Saudi Arabia vs. Russia: Impact of a $75 bbl Oil Price

Over the next five years, the effects of the global oil-and-gas boom should prove a grim object lesson for the Russian economy on the downside of the “resource curse.” Russia’s economy “largely depends on energy exports,” according to a study from the U.S. Energy Information Administration. That works well when prices are high, but quite badly when prices fall.

Oil-and-gas revenues account for 70% of Russia’s total exports and more than half the income of its federal government. Russia exports more than seven million barrels of oil a day, second only to Saudi Arabia. One key difference between Russia and the No. 1 exporter is that more than 60% of Russian oil is produced in Siberia, where costs are much higher. A fall in the world price to $75 from $100 would therefore have a much greater impact on the net revenues that Russia earns from oil than is earned by the Saudis.

The downside of the resource curse could also be felt in Russia’s reliance on sales of natural gas. About 75% of Russia’s natural gas exports go to Western Europe, providing 30% of its requirements, at prices that are two and three times the price in the U.S. _Barrons

Update: A contrary opinion claiming that $90 or $95 bbl oil is more likely than $75 bbl oil.

Several things go into the cost of oil, including “finding” and “lifting” costs. That is just the beginning.

Costs for Producing Crude Oil and Natural Gas, 20072009
2009 Dollars per Barrel of Oil Equivalent1

Lifting Costs Finding Costs Total Upstream Costs
United States Average $12.18 $21.58 $33.76
    On-shore $12.73 $18.65 $31.38
    Off-shore $10.09 $41.51 $51.60
All Other Countries Average $9.95 $15.13 $25.08
    Canada $12.69 $12.07 $24.76
    Africa $10.31 $35.01 $45.32
    Middle East $9.89 $6.99 $16.88
    Central & South America $6.21 $20.43 $26.64

15,618 cubic feet of natural gas equivalent to one barrel.

Source: Tables 10, 11 and 12, Performance Profiles of Major Energy Producers, 2009.

Last reviewed: January 15, 2014
Source: http://www.eia.gov/tools/faqs/faq.cfm?id=367&t=6

Breakeven costs for an oil state such as Russia or Saudi Arabia are calculated differently than breakeven costs for oil-producing companies such as US shale oil producers. While most US shale producers can make a profit at $75 a bbl, Russia could not finance its national budget with oil at that price. Saudi Arabia would have difficulty if the price stayed that low for more than a year, but Russia would have serious problems within days or weeks of oil falling that low.

Russia needs oil to be priced at or above $125 a bbl for sustained breakeven, so an oil price of $75 bbl would be a “blood in the streets” disaster for the current Russian oil & gas based kleptocracy. Even at today’s prices, Russia is beginning to hurt.

The spread in price between oil and natural gas is another key metric to keep in mind. Cheaper natural gas from shale deposits is likely to begin finding its way to Russia’s gas customers — who are currently paying through the nose for Russian gas.

China and Europe have significant shale gas deposits which — if developed — would reduce their need for Russian gas appreciably. Russia would be forced to lower its exorbitant prices, and the Russian government would have to get by on less hard foreign currency. Bad news for Tsar Vlad and his corrupt minions.

US Congressmen from Texas and Oklahoma are already developing a bold new energy plan which they hope to enact once the energy-starvationist Obama administration is well and truly put to pasteur. If enacted, such an ambitious energy policy would almost immediately improve the economic prospects of large parts of the US from coast to coast to coast to coast . . . It is impossible to overstate the economic drag that Obama’s anti-energy policies have placed on the US national economy.

These are issues that have been looked at extensively and repeatedly at the Al Fin Energy website. But thanks to Google, administrative access for that site remains blocked, so we will try to pick up some of the slack here from time to time.

Breakeven Prices for Oil States circa 2011 Breaken Prices are Higher Now http://www.econmatters.com/2011/12/chart-of-day-global-oil-breakeven-price.html

Breakeven Prices for Oil States circa 2011
Breaken Prices are Higher Now
http://www.econmatters.com/2011/12/chart-of-day-global-oil-breakeven-price.html


Remember: National breakeven prices are determined politically, when government budgets are compiled. For many reasons, Russia’s breakeven price is close to $125 a barrel in 2014. With actual prices closer to $110 bbl, Putin feels the need to shake things up geopolitically, as well as using his influence with the international oil trade — anything to get prices higher.

Putin is squandering Russia’s oil riches on personal ambition and crony payoffs. Another case of high level energy corruption can be seen in Venezuela. Tin-pot dictators thrive on cash-flow adrenaline without the discipline to over-ride personal hubris and ambition to apply profits rationally for the better future of their constituents.

More: Most Canadian oil sands producers would ride out an extended period of $75 bbl pricing due to improved economies of production.

The Earth has a lot of known hydrocarbons waiting for better ways to be produced. The shale revolution and the Canadian oil sands revolution are just the beginning. Venezuela has massive deposits of heavy oil which could benefit from the Canadian developments of more economical production. Most oil in “depleted oil fields” remains in place, waiting for better and cheaper methods of enhanced oil recovery. Most of Earth’s hydrocarbons have not been discovered yet — and probably never will need to be discovered. Using the cheap and abundant high quality heat from advanced gas-cooled nuclear reactors, there is already more than we will need for many centuries.

As always, the lefty-Luddite green dieoff.orgiasts remain among the greatest obstacles to a clean, abundant future.

The problem with lefty-green climate and energy policies is that they are based upon delusional ideas about climate science, and pie-in-the-sky ideas about big wind and big solar energy. Those delusions in combination are fatal to an economy. __ Source

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6 Responses to Saudi Arabia vs. Russia: Impact of a $75 bbl Oil Price

  1. bob sykes says:

    This morning’s oil prices are WTI $101/bbl and Brent $107/bbl. This has been about the trading price for some time.

    So, a few questions:

    1. Oil demand is steadily increasing (assuming no global depression coming), so it would seem there is upward demand pressure on these prices. Why should we expect a fall to $75/bbl.

    2. I read somewhere that fractured gas wells have a fairly limited production time, perhaps as short as 3 years. Does this mean the downward price pressure due to increased production is temporary?

    3. Is the Russian sustained break-even price really $125/bbl? That seem extremely high. Is there something unusual in their production costs?

    I agree with you about the huge carbon reserves yet untapped (and I am a CO2 denier as far as the principal driving force on climate is concerned), but the extraction costs of these reserves is likely astronomical, and they might only serve as feed stocks for the CPI, not as fuels.

    Also, I agree with you about nuclear power, but the uranium reactors had the benefit that the entire infrastructure for mining and enrichment was piggy-backed on the weapons industry. There is no similar subsidy for thorium, so its development will be painfully slow, at least until uranium reserves are depleted.

    As to fusion, that is a pipe-dream. The only fusion reactor we will ever have is the sun. And the best way to extract its energy is orbiting solar mirrors. Unfortunately, these can also be weapons and would be subject to international control.

    Finally, we should not underestimate the pain Russia (and not just Putin, who is its avatar) will endure to pursue its national goals, especially its revanchist ones. Think WW II, Stalingrad, NEP, etc. In any test of wills, the West loses.

    Putin has just given Obama and the EU a way to climb down from the escalation ladder before they climb up to war: a nonaligned, federal Ukraine. That is a deal that actually makes sense. Better, the EU gets to eat Ukraine’s economic disaster, and the bailout monies end up in Russia.

  2. alfin2101 says:

    Thanks. Some interesting questions and perspective. Accurate predictions are difficult to make, particularly when they involve the future.

    Most of your questions are addressed by the Barrons article linked above.

    A useful contrary opinion can be found here.

    If we think about global oil demand a bit more deeply than the mainstream generally goes, we can see that further demand increase depends largely upon financial stimulus and global market conditions. We have seen plenty of bubble stimulus in the BRICS and other economic arenas such as Obama’s US. But the global economy and the main drivers — North America and Europe — have not really recovered from the implosion of the mid-noughts. Debt and demographic dysfunction continue to worsen in most of the Anglosphere and Europe.

    China and India are expected to increase in hydrocarbon (coal, oil, gas, etc) demand, but that is not a certainty. How long can the bubble keep inflating? As for Africa and other third world regions, without foreign aide and assistance, subSaharan Africa would crash. Demand would disappear. Artificial, subsidised demand is not a sure thing, and becomes less sure as the years and decades pass.

    Ever-rising demand is not a sure thing.

    As for whether oil supplies will bloom, that depends mainly on political decisions, not geological or technological developments. The geological reserves can expand immensely, and the technological means of exploiting reserves can become far more affordable over time, but if political density is too high (eg Obama’s EPA or Germany’s Greens), intermittent shortages and price spikes are likely.

    To get more information on Russian breakeven (approx $125 bbl) consult Al Fin Energy blog articles on that topic. Remember, national breakeven costs depend largely upon political ambitions of leadership, combined with high level corruption. For ambition and corruption, nobody does it better than Putin and his inner circle.

    As for the “crisis du jour” of Putin and his claims to the grand new Russian Empire, I prefer to stand back and ignore most of the drama that the media thrives on. Putin needs all that drama to build his international rep and boost energy prices. Russia is in bad shape from a public health perspective, from a national morale perspective (do you really believe any opinion polls coming out of a Russia where media is 100% Putin controlled?) etc.

    Anyone who wishes may migrate to Russia, but besides Muslims in former client states, most of the migration in Russia is internal migration of ethnic Russians from the periphery to the cities. That is an ominous sign for the future of Russia’s ability to control its vast real estate.

    I appreciate all points of view, although I am not likely to agree with all.

  3. bob sykes says:

    Thanks, especially for the references to earlier posts.

  4. WestwardHo says:

    This approach to trans fuel makes me hopeful, hopefully that’s not misplaced:
    http://www.openfuelstandard.org/
    http://www.thenewatlantis.com/publications/why-and-how-we-should-break-opec-now

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