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Russia Braces For Permanent Decline In Oil Demand

Russia has signaled it may be starting to prepare for a permanent decline in crude oil demand over the long term, even after the devastating effects of the coronavirus pandemic are over.

“The peak of consumption may have already passed,” Deputy Finance Minister Vladimir Kolychev told Bloomberg in an interview. “The risk is rising in the longer term.”

In that, Kolychev is far from alone. The view that oil consumption has already peaked or will peak much sooner than previously expected is fast approaching the status of a new industry consensus that will drive long-term investment decisions. In Russia’s case, these decisions are critical because oil revenues still make up a sizeable portion of GDP.

At the moment, Kolychev told Bloomberg, the Finance Ministry is studying several scenarios for oil demand development over the long term, with different levels of demand decline, but he did not go into any details about the scenarios.

For now, it appears there is no clear plan for an energy transition, although Moscow earlier this year released a roadmap to a hydrogen economy, in which zero-emission hydrogen will feature prominently in Russia’s energy export mix. According to the roadmap, Gazprom would begin producing clean hydrogen in four years, and Novatek, the LNG major, is also planning hydrogen projects for a less oil-dependent future.

Speaking of clean energy, it does not make up much of Russia’s energy generation right now. At a meager less than 1 percent of the total, solar and wind are negligible as a part of the electricity generation mix. Hydropower, on the other hand, makes up more than a quarter of Russia’s total electricity production, which perhaps ironically puts it ahead of some more environmentally conscious countries with ambitious renewable energy plans. Related: 3 Oil And Gas Stocks Outperforming The Market

Despite the lack of preparation, now seems to be the best time to start preparing. Like other major oil producers, Russia has been hit not only by the pandemic but also by the oil demand destruction it created. Unlike most, its economy rebounded quickly because of the limited lockdowns, even though these likely contributed to Russia being the fourth worst affected country in the world.

In fact, it was Kolychev who recently told the Financial Times in an interview that Russia’s economy rebounded faster than European economies thanks to the measures implemented by the government, including an increase in public spending and a stimulus package that external observers have called limited. Kolychev added that were it not for the OPEC+ deal to cut oil production, the effect of the pandemic on Russia’s economy would have been negligible.

This is a sentiment other OPEC+ deal participants share, too, and it was the reason why the extended oil cartel last week agreed to start boosting oil production by half a million barrels daily from next month, which Russia proposed.

Oil will continue to be an essential commodity for Russia for the observable future, whatever scenarios the Finance Ministry is studying. It’s no coincidence that during this year’s crisis, Moscow refused to tap its sovereign wealth fund of $167 billion for direct handouts to households and businesses but instead opted for tax relief and direct support for families with children.

Yet the pandemic and its effect on oil demand—as well as the energy transition push that has received a major push from the pandemic—must have made it clear to decision-makers in Moscow that oil demand will not be a constant and steps need to be taken to ensure the economy continues to grow even if demand for oil continues to decline. What these steps will be remains to be seen.

By Irina Slav for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on December 09 2020 said:
    A scenario doesn’t make a decline in global oil demand a reality even if is suggested by the Deputy Finance Minister of Russia. It is just one of many scenarios his ministry is studying to project trends in the market and prepare for them.

    Furthermore, The Russian economy is very highly advanced, sophisticated and highly diversified. Contrary to claims otherwise, oil and gas exports accounted for only 14% of Russia’s GDP in 2019, 48% of Federal budget revenues and an estimated 50% of exports. Still, oil and gas will continue to be a major industry in Russia well into the distant future.

    Moreover, the notions of zero emissions and an approaching peak oil demand are fads promoted by those with vested interests either to burnish their environmental credentials like the European oil majors and investment banks or by a clique of militant environmental activists and hydrocarbon divestment campaigners aiming to intimidate companies around the world to greenwash themselves or by those who are influenced by fake news bombarded at them by the media on daily basis.

    Oil and gas will continue to be the core business of the global oil industry and the fulcrum of the global economy throughout the 21st century and probably far beyond.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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