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, 2007–2009
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

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