If Vladimir Milov is a mite hazy on the mechanics of capitalistic business mechanics, he apparently knows enough about oil production to suggest that Russia should not be producing more than 7.8 mb/d of this commodity instead of the 9.5 mb/d that was recently announced. The latter figure implies that in order to maintain this production, serious long-term damage is being inflicted on reservoirs. In an easily read article in the important ‘Geopolitics of Energy’ (2006), Julian Lee of the Centre for Global Energy Studies adds that Russian oil production hit a post-Soviet high in November 2005, of 9.6 mb/d.
Professors Sadek Boussema and Catherine Locatelli of Grenoble University have also examined this subject (2005), noting that forecasts of Russian output in 2010 range from 6 mb/d to 12 mb/d, while in 2020 the range is between 5 mb/d and 11 mb/d. I think we can say that these are the kind of numbers that are being bandied about in the executive suites of the oil majors, although they might not be made available for general viewing. I also suspect that figures like these would prevent much credence given to forecasts by the IEA and USDE of a global oil output in 2030 of 121 mb/d, with OPEC supplying 65 mb/d and Saudi Arabia 23.2 mb/d.
At one stage in my forthcoming textbook I begin with the patently unrealistic value of 121 mb/d for global output in 2030, and estimate that OPEC would have to supply at least 60 mb/d forecast to be realized. This is almost certainly impossible, as is the estimate by the POLE model (mentioned by Boussema and Locatelli) of an OPEC supply of crude of 40 mb/d in 2010, as compared to slightly less than 30 mb/d at the present time. The upshot of all this is that the world oil supply situation leaves a great deal to be desired by those of us on the buy side of the market, and reinforces the dreary predictions and analyses of the Association for the Study of Peak Oil (ASPO).
The Barents Sea did not play much of a role in the above expositions, but according to the Norwegian foreign minister Jonas Gahe Store (2006), it is ‘Ett hav av möjligheter’ (A sea of possibilities). This may be true, even though that gentleman hardly has the background to discuss this issue with a knowledgeable audience. An outstanding discussion of this region however is that of Paul de Zardain (2005), which helps to substantiate my belief that Russia is in a similar situation to that existing in the United States: a huge area but with access to much less oil than was taken for granted only a short time ago. He also emphasizes the complicated oil politics in Russia, however I see no reason to spend time examining these because the bottom line is the above figures, which indicate that regardless of how things work out, and who gets or loses what job, Russia is not going to be able to deliver anywhere near the amount of oil that we would like for them to deliver.
It has also been mooted that there is a possibility that Russia is in possession of large oil deposits that were overlooked in earlier ‘sweeps’. In considering Iraq and Saudi Arabia, it appears that some oil experts in the Bush administration have strongly recommended the extensive use of advanced seismic technology; but I would like to inform them that during the past two decades, seismic technology has revealed the absence of new large fields. Moreover, since a number of existing and potential producing countries are as interested in investment dollars as they are in income from actual production, they would hardly appreciate having their lack of productive capabilities revealed by seismic or other means. It is also the case that the petroleum engineers of Saudi Arabia, Iraq and Russia hardly require any advice from Washington.
And the Caspian – or what some observers have come to believe is the richer part of the FSU in regard to oil!
The Caspian was referred to as the next oil frontier in a long article in Business Week (May 27, 2002). The most interesting item in that exposition was a notice that by 2010 the Caspian could claim 3% of global oil output. The well-known oil economist and consultant Mamdouh G. Salameh more or less agrees with this figure in his article ‘Caspian Sea is no Middle East’ (2002), in which like other researchers he likens this region to the North Sea in terms of reserves and output potential. This means a great deal of oil, but unfortunately not enough, because the production build-up in that part of the world may not exceed by much the increasingly rapid decline in the North Sea.
Professor Maureen Crandall of the U.S. National Defence University calls the Caspian “overhyped” (2005), and I am sure that she is correct. Salameh uses the expression “The Great Game” in his article, which has overtones from the work of Rudyard Kipling, but which now refers to who owns Caspian oil and controls pipelines in the vicinity instead of the high-jinks on the Northwest Frontier of India that featured Victorian England and Tsarist Russia. To me the ‘Great Game’ might refer to certain aspects of the course in game theory that I am preparing, and in particular the part involving threats, insinuations, ignorance (or more politely ‘lack of information’) and of course blatant as well as unobtrusive lies.
In the Business Week article referred to above, a U.S. Assistant Secretary of State for European and Eurasian Affairs tied the U.S. commitment in the Caspian to the goal of eliminating terrorism. I prefer to believe that the goal is helping to get rid of the threat or actuality of a sudden lack of oil. In this case “American soldiers, oil men, and diplomats” – to use the lingo of the article – are probably in the wrong place, although identifying the right place is unfortunately beyond the capacity of this teacher of economics and finance.
Crandall provides some estimates for production in this region for 2010 and 2015. These are 3.25 mb/d and 3.6 mb/d respectively. This isn’t a great deal, but unlike the situation in Russia, domestic consumption may not place an excessive burden on export possibilities. It will though place more of a burden than in most oil producing countries along the west coast of Africa, where diplomats do not have to be on hand to explain to well over 90 percent of the local population that they should not get their hopes up that they will share in any oil income that might befall their homelands.
An interesting feature of the present Russian scene was the establishment of a so-called energy fund in 2004 whose ostensible purpose was to cushion the federal budget from a slump in oil prices. This fund apparently invests most of its receipts in high-grade fixed-income securities (i.e. bonds). Some economists have claimed that this fund should follow the lead of Norway, and be put in the hands of external asset managers to invest in potentially high yielding shares and bonds, and also currencies. The fund now has about 61 billion dollars, which makes it very attractive to many professional asset managers because of the potential management fees.
The opinion here is that a large part of this capital should be invested in technical and health care education for secondary school students, and others, which might enable Russians to fully realize the gains associated with the conscientious application of modern technology, which the excellent Russian engineers and scientists have no difficulty in mastering and introducing into their country. According to the World Bank’s chief economist for Russia, the fund could reach 2.3 trillion dollars if properly invested in financial assets and left untouched. “Properly invested” is the key phrase here, but given my knowledge about the smarts of World Bank busybodies, I doubt whether they are the right people to become involved with this or any project.
Mr Chief Economist and others should also be aware that Norway has a huge fund that every year yields the Norwegian government a great deal of money. I have heard it said though that with reference to health care, this money has not been deployed efficiently. And it probably hasn’t been deployed efficiently elsewhere for that matter.
The Russian oil economy is not easy to figure out, as is evident from the timely and well-known book of Jennifer Considine and William Kerr (2002). I’m not sure however that I need to spend any time here on its qualitative aspects, because the key issue is and will continue to be how much oil that country and the other former members of the Soviet Union will produce and/or export in the future. The conclusion in this paper is that it won’t be enough, regardless of the actual figure.
I have also noted that the widely quoted figures for oil production in 2030 by the International Energy Agency and the United States Department of Energy are not credible, which implies that there will be a global oil output peak before that time – unless somebody decides to take some oil at gunpoint.
Everyone does not share this belief, to include Ronald Bailey, the science correspondent of Reason Online. Let’s see if we can straighten him out. Oil production peaked in the U.S., in Russia, in the UK and Norwegian North Sea, in Indonesia, etc etc. It has flattened in China and India, where consumption is leaping ahead, and macroeconomic growth rates are the highest in the world. It had also flattened in Canada until it was decided to add tar sends to conventional reserves and production, but this is all right because as with several other regions of great hope, such as the Caspian and Mexico, the upward boundary on production is clearly visible. It may also be relevant to note that only slightly more than one barrel of oil is being discovered for every three consumed. That we can get these peaks and plateaux everywhere, but in the light of the global rate of increase of consumption, global output will not peak, suggests to me that when discussing oil, Reason Online should be renamed Unreasonable Online.
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