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Sunday, 3 January 2016

When the oil markets are ill, the Russian economy gets in a coma! The ultimate “two-trick pony” Russia can’t come up with new tricks to do, so it pumps up oil ‘like there is no tomorrow’, in spite of the plummeted price level of oil.

The news that Russia ended December 2015 with a record production of oil, in spite of the extremely low prices per barrel, is peculiar, but not surprising.  

Russia is the ultimate ‘two trick pony’, with the production of oil and gas and the fabrication and export of weapons as almost its only two tricks. So in order for the Russians to keep up their standard of living, the oil dollars must keep on flowing into Russia.

Well over four years ago, I wrote an article about the dependency of Russia from the oil markets.

This article, with the tell-tale title “When the oil market sneezes, Russia catches a cold”,  described how enormously large changes in oil prices mattered for the Russian Gross Domestic Product. For the sake of this article, I copied the two charts which were part of the August, 2011 article, in combination with a few snippets:

The fluctation of the Oil prices in 2010 and the
consequences of this development for Russia
2011 chart courtesy of
Click to enlarge

Four possible extrapolated annual incomes,
based upon fluctuations in the oil price in 2010
Chart by: Ernst's Economy for You
Click to enlarge
To show you how problematic these dropping oil prices could be for Russian GDP, I took a YTD chart on WTI Crude and multiplied the 2010 Russian production of 10,15 mln barrels with the four price levels that I point out in this chart.

It becomes clear from this calculation that the difference between the highest and lowest oil price in 2011 is a theoretical yearly revenue of $126 bln. And it becomes also clear that when the oil price structurally drops under $79,32, Russia has a serious revenue problem.

Therefore you could say that when the oil market sneezes, Russia catches a serious cold.

Lately, I had noticed that this very old article had entered into a “second youth”, as it gave insight in the current economic conundrum that is playing for president Vladimir Putin. Nowadays, with the current oil prices of roughly $35-$40 per barrel, the problem is even more topical and scary in its possible consequences.

With such erratically low oil prices, the Russian state misses an enormous part of its usual annual income, for which it is virtually impossible to find an alternative soon.

How desperately the Russians are strapped for cash currently, becomes clear from the following two articles, which have been printed in the Dutch newspaper Telegraaf and the Russian(!) website Sputnik News:

With respect to oil production, also Russia became a frontrunner in their struggle for market share. This month a new record in oil production was set by the country.

In comparison with November, the outflow in December increased by another 0.4% to 10.825 million barrels per day.

Also for 2016, the Russian government is not considering to pinch off the production capacity. During last year the oil price dropped dramatically after OPEC countries refused to diminish their production, in spite of the plummeted demand and the persistently high production of shale gas.

The world power Russia is for over 40% of its annual income dependent on oil. The oil price for Brent quoted $37,28 per barrel on December 31st. Russia’s export [to the non-CIS countries – EL ] rose by 11%.

And in its article, Sputniknews added to this news that the Russian oil production in 2015 had grown by a staggering 40%, in comparison with 2014:

Russia's oil production reached a record 534.081 million metric tons in 2015, media reports said.

In 2015, Russia's oil output amounted to a record 534.081 million metric tons, 40 percent higher than in 2014, according to media reports.

Russia's oil exports to non-CIS countries increased by 10.6 percent and reached 220.267 million tons, sources said.

Russia Deputy Prime Minister Arkady Dvorkovich, for his part, said that he does not believe oil prices will plummet to 25 dollars per barrel. At the same time, he added that the period of such low prices "cannot last too long." When hammered out, Russia's budget for 2016 stipulated global oil prices would be about 50 dollars per barrel.

There is a lot of hope and despair encapsulated in both the statements that ‘the oil prices will not plummet to $25 per barrel’ and that the period of such low prices ‘cannot last too long’.

And although a calculation price of $50 per barrel does not sound unreasonable by itself, it remains the question whether such an average oil price will actually be achieved in 2016. As one of the savvy professors at Minyanville once said: ‘Markets can remain erratic for a longer time than people or countries can cover their losses!’  

Let’s take the bull by the horns and let’s try to calculate what income Russia generated from this massive production of oil in 2015.

I do so, calculating with a production average of 10.73 million barrels per day [this is the 534.081 million metric tons per annum, mentioned in the Sputniknews article, recalculated to average barrels per day – EL], multiplied by the average price per barrel per month (based upon the WTI Crude price), which I retrieved from the following chart by Ycharts. Of course this method of retrieving monthly prices is quite rough and consequently not very precise, but it will do the job.

The fluctation of the Oil prices in 2015
Chart courtesy of
Click to enlarge

The annual Russian oil income in 2015,
based upon calculations with the average monthly oil price
Chart by: Ernst's Economy for You
Click to enlarge
When we compare this approximately $191 billion in Russian annual income from oil for 2015 – even with the current record production during this year –  with the extrapolated annual income amounts in the second chart of this article (ranging from $293 billion to $420 billion per annum in 2011), it becomes perfectly clear that the Russian economy has been hit by a bulldozer, due to the dropping oil prices.

And even more when we take into consideration that – as the Telegraaf article states – oil income amounts to 40% of the total Russian Gross Domestic Product (GDP).

Nevertheless, the Russian oil production in 2016 will probably remain at a “suicidal” level, in spite of the dramatic price development of last year. In order to generate enough income for the state and its (wealthy) citizens, the Russian oil pumps must be fired up into infinity, like ‘there is no tomorrow’. With Saudi-Arabia’s equally suicidal strategy to keep their production levels also very high, in spite of the expected fierce competition from Iran and the US in combination with the disappointing global demand for oil, the chances that the oil prices will go up soon are very dim.

For both countries the reason for their ‘erratic behaviour’ is simply summarized by the abbreviation T.I.N.A.: There Is No Alternative!

The Russian weapons industry alone is not able to fully cope with the Russian misfortune at the international oil markets. And further the Russian manufacturing industry is still ailing in comparison with Europe, Asia and North-America.

The same is true for the Russian agricultural industry, as well as the commercial and financial services industries, wherein the effects are reinforced by the economic boycotts that have been established by the EU and the US. On top of that the Russian economy as a whole already showed its enormous fragility in the last quarters of 2014 and the whole year 2015.

Although not everything bad in Russia can be blamed upon Vladimir Putin, he can be held widely responsible for the fact that he never undertook serious attempts to make the Russian economy stronger and more independent.

He failed to establish a credible constitutional and legal state that would have enjoyed the trust and confidence of global investors and he also forget to spur new developments in the manufacturing industry or the financial and commercial services industries in Russia, thus diminishing the country’s enormous dependence on oil.

All the Russian oil money, gained during the last fifteen years, seems to have disappeared in either the pockets of corrupted officials and business men, in building and housing projects for the more well-to-do Russians and in roads and infrastructure. Or in monstrous, prestige projects like the 2014 Olympic Games and the 2016 World Football Championships, which by themselves created a whole, vast network of gargantuous megalomania, corruption, bribery and spillage.

The generally high oil prices of the last fifteen years meant an enduring party for Russia that lasted for a long time. Everything was cool as long as the money flowed in. Now, however, it seems that the oil party is definitely over.

The chance for real improvement of the oil prices in 2016 is still very small as I argued in the aforementioned parts, in spite of the hope expressed by the Russian minister. The whole situation for both Saudi-Arabia and Russia reminds of a Catch-22 situation with no way out:
  • Producing more oil means lower oil prices and less income per barrel
  • Producing less oil means higher oil prices, but a plummeting income per annum

And every favourable change in the oil production (down) and oil prices (up) leads to new competitors stepping on the driving train, like Iran and independent oil producers in the US and Canada.

My first article about the Russian oil income was named: When the oil markets sneeze, the Russian economy catches a cold!

Now this article is titled: When the oil markets are ill, the Russian economy gets in a coma!  

And that is the way it is.

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