Russian Oil Production Appears to Have Peaked


"The old paradigm where oil producers both had the discretion to increase production as prices fell, and the ability to do so, is over."

The United States reached peak oil production in 1971, as forecast by M. King Hubbert, the Shell geologist. Before that time, the U.S. attained a form of glory in its oil age with spectacular discoveries in Texas, a robust industry, strong exports to the rest of the world and lots of free wildcatting.

Russia appears to have peaked now, without enjoying any such glory. Russia's oil industry now resembles the unbuilt buildings of Russia's futurists, from the 1920s. Production, which was boosted to new heights in 2007, has now fallen 1.00% in calendar year 2008. But the chatter out of Russia is much darker, than a 1.00% fall would suggest.

First, Russia does not have as much easy oil as is found in the Arab states. This makes Russia's achievement in this decade, when it was able to match Saudi Arabia in daily production above 9 Mb/day, all the more impressive. But we know that a goodly portion of Russia's ability to increase production from 2000-2008 comes directly from its previous collapse. In other words, Russia did not discover a lot of new oil this decade. It simply went back to mothballed wells, many of which were aging-and they tend to have a surge flow after reopening, only to reach peak quickly thereafter.

More relevant now to the world however is the ability of Russia to export oil. 2008 saw Russian oil exports fall by over 5.00% and the outlook is not pretty from here. Current prices are simply way too low for great swaths of Russian production to carry on profitably. While GDP per capita is still much lower in Russia than in the OECD, Russia simply does not have the kind of dirt-cheap labor or materials advantage that it enjoyed just 10 years ago. Very few oil producers do. And as a general point, oil at $45.00 continues to set the stage for a supply collapse. Russia is vulnerable to a huge drop in production.

The old paradigm where oil producers both had the discretion to increase production as prices fell, and the ability to do so, is over. Non-OPEC supply is on a severe downward supply path. Some are even calling for a global supply collapse. Randy Ollenberger, managing director of oil and gas research at BMO Capital Markets, said global oil supply could decline by as much as 20 million barrels a day over the next three years if the oil industry stops investing.

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