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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Russia's Invasion Of Ukraine Is A Catastrophe For Its Oil Industry

  • A huge portion of Russia's gross domestic product comes from its oil exports, and nearly 80% of those exports go to Europe.
  • While Europe will suffer in the short term as it moves away from Russian oil, a majority of the pain will be felt by Russia’s oil industry as it attempts to sell to China and India.
  • The focus for both Europe and the United States now will be on promoting domestic energy, whether that is fossil fuels, renewable energy, or nuclear.

A quick look at the numbers will show just how intertwined Europe and Russia are, and how the Russians have taken aim at the goose that lays the golden eggs. Here are the numbers, all rough and all changing fast. First, the world consumes about 97 million barrels a day(b/d) of oil. The Russians produce about 11 million b/d. They are big producers. They export about 8 million b/d. Now it gets pertinent to today’s crisis. The Russians send about 80% of their exports to Europe. And the Europeans get 40% of their oil from Russia. In other words, getting off Russian oil within five years, the European goal, requires finding roughly 6 million b/d of alternatives, whether other oil sources or non-oil energy or energy efficiency measures. This will take more than going to Saudi Arabia or the United Arab Emirates and asking them to be nice and turn up the “spigot” by, say, one or two million barrels a day.

That is one side. But consider the Russian side. Russia will bring in maybe $300 billion per year from oil exports at current prices. Russia’s entire gross domestic product before the invasion was only $1.5 trillion, making its economy smaller than that of Italy and about the same size as New York State’s. Near-term sanctions on Russian oil might have a brutal impact on Europe, but they will have a catastrophic one on Russia. In the long term, even if the war ends shortly and sanctions with it, Russia stands to lose its biggest export market. The Europeans (including the British who are not dependent on Russian oil) have already taken active steps to preserve nuclear power, build renewable generation, and develop hydrogen resources. The Ukraine war just accelerates those efforts while also eliminating Russia’s nuclear export potential, at least to Europe.

In the United States, politicians are taking a different tack. The Ukraine war shows, to them, the need to expand fossil fuel production and remove environmental safeguards that might slow that process. The nuclear lobbying effort in Europe has increased, as we see it, and we would expect the same to take place in the U.S. What we do not see, though, is a coherent national effort to finance nuclear power. This is surprising considering how much money the construction (and related) industry could make on a wholesale expansion of nuclear power. But that is another matter. 

To sum up the economic consequences of this awful conflict, the Russians have taken steps to aggrieve their biggest energy commodity customers to the point that the customers intend to end the relationship. This jeopardizes one major source of income that maintains the Russian economy. This suicidal commercial move could upend the oil and gas markets. After this, the Russians will have to switch to China (or India) as their principal commodity purchaser. And with no other recourse, the Russian oil and natural gas sellers will take whatever a monopsonistic buyer offers to a temperamental supplier. Which is as little as possible. For Europe, the war will lead to a scramble for oil and gas supplies, a renewed effort in the renewable sector, and possibly a nuclear revival or at least a postponement of existing plant closures. We expect similar activity in the United States with more emphasis on fossil fuels production. But in reality, high fossil fuel prices make competitive energy sources like renewables and nuclear look more attractive in the long run. President Putin may have done more to endanger the future of the fossil fuel industry than anyone in its history. For many, the question will now become, “Who needs these ongoing geopolitical risks when we can make (at least some) of our own energy nearby?”

By Leonard S. Hyman and William I. Tilles

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  • Mamdouh Salameh on March 21 2022 said:
    Contrary to the authors’ views, Russia’s oil industry will survive the Ukraine conflict and thrive afterwards for the simple reason that it is the world’s largest producer and exporter of crude oil producing in normal circumstances (without the OPEC+ cuts) 11.7 million barrels day (mbd) and exporting more than 8.0 mbd. Moreover, Russia’s oil industry will be still standing on its feet when all international oil companies (IOCs) would have shrivelled or disappeared altogether. Russia’s Arctic will be one of three regions in the world which will most probably be producing the very last barrels of oil. The other two are the Arab Gulf region and Venezuela’s Orinoco Belt.

    No country in the world or a group of countries combined including OPEC+ and US shale oil can replace Russian oil exports now or ever. Moreover, any sanctioning of Russian oil exports will inflict a horrendous damage on the global economy particularly the United States’ and the EU’s economies. Russia will continue to sell its crude to China, India and many other countries and also to oil traders who wouldn’t to miss a chance of making money by not buying discounted Russia oil.

    The EU which is dependent on Russian gas for more than 41% of its needs and Russian crude oil for 30% will continue to be dependent on Russian oil and gas exports well into the future. The EU will be deluding itself if it believes it can reduce its dependence even slightly in the next ten years.

    The US is the world’s second largest importer of crude oil after China importing 9.0 million barrels a day (mbd). It is more vulnerable to oil price shocks than other major economies.

    The combined Russian oil, gas and coal exports account for only 15%-25% of Russia GDP according to official Russian data and not a huge chunk of GDP as the authors claimed. Moreover, Russia’s GDP in 2021 was $4.32 trillion or the world’s sixth largest economy based on purchasing power parity (PPP), the reliable measure both the World Bank and the International Monetary Fund (IMF) use to measure and compare world economies.

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

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