Chart of the Week: Russian Crude Oil Production
Posted October 3, 2008 at 6:37 am 
Filed in: There are essentially three factors contributing to today’s high oil prices. They are:
1) Rising oil demand in emerging market economies;
2) Ongoing geopolitical instability in key oil-producing nations/regions; and
3) Continuously weak growth in world oil production
The third of those factors is underlined this week by reports that Russian oil production is now very likely to average less in 2008 than in 2007. This turning point has been growing increasingly likely all year, but with September’s data now in, it appears all but certain.
This is a significant development for a number of reasons. First, it reinforces the pattern of ongoing stagnant non-OPEC supply growth detailed well, for example, in the IEA’s September Oil Market Report. Second, it highlights the importance of national tax policies on oil production. Earlier this year, Russia raised the tax-free threshold of its mineral extraction tax—from a paltry $9 per barrel to $15! In an era of soaring E&P costs, it is not hard to infer the impact of such a constrictive tax policy on the domestic industry’s investment capabilities. Though recent reports suggest that this threshold may soon again be raised, it will likely be quite some time before the benefits of any less restrictive tax policies are borne out by new oil production.
Last, but not least, this provides further anecdotal evidence that the U.S. must take its energy security into its own hands. Conditions in the global oil market are, to say the least, less than favorable in terms of promoting stable, affordable energy prices. Even outside of OPEC, supply growth is wrought with uncertainty. We need to use less, produce more, and diligently search for alternatives.
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