[dissident]

Since there has been a string of articles posted on the front page all harping on the same theme, this thread is intended to clear up an aspect all of them ignore.

http://rbth.com/business/2014/10/17/rub ... 40689.html

Since the beginning of the year, the value of the ruble has dropped by 20 percent against the dollar.

According to Russian Finance Minister Anton Siluanov, "A one-dollar decline in oil prices results in a 70-billion-ruble reduction of revenue for the Russian budget. While a one-ruble fall in the exchange rate leads to a growth of 180-200 billion rubles."

70 x ($108-$75) = 2310 billion ruble loss

190 x (44-33) = 2090 billion ruble gain (assuming the ruble is allowed to slide lower if oil goes down to $75)

Yes, indeed, the end is neigh for Russia in the minds of the pundits.

[Kylon]

It's unlikely that oil dropping to 75$ will cause the Russian state to collapse.

For a number of reasons-

1. Russia's governmental power over it's population has not historical been that tied to economics. Even with what we would consider third world living, they maintained a firm grip over their population. Should their economy go down significantly, their government could maintain control. Barring the level of economic incompetence and failure that accompanied the collapse of the Soviet Union, they should still maintain control of their society.

2. There is a VAST amount of corruption in Russia. If things got desperate, they could confiscate a great deal of the stolen wealth, or reduce corruption. A vast reduction in corruption would free up more resources to maintain their society.

3. There is a vast amount of room for improvement in the operation of their society. Currently, unless your well connected or protected, it's very hard to do business in Russia. If Russia were to move more towards a rule of law type society, they could unleash the creative and entrepreneurial abilities of their people to a greater extent, and cause a significant amount of economic growth. This of course won't happen as long as things are going well for those in power. As long as they can simply live off of a resource extraction type economy they will, as it means more power, less risk, and less work for them. But if push comes to shove, they would probably rather reform their society, then risk being removed from power either from within or without.



I don't think Russia will collapse (politically) from lower oil prices, unless the leadership in Russia is unwilling to make necessary reforms.

However, it might decrease any imperialistic ambitions that the Russians might have, and perhaps could decrease their involvement in foreign affairs.

[eugene]

Had to keep reminding myself you were talking about Russia. Was sounding like someone else I know.

[AgentR11]

Its confusing because the sanctions create pressure on the $US/ruble rate that far exceeds the domestic inflation rate; and most of the Russian government's expenses are expenses in rubles, not dollars. It throws us a bit because Russia imports nothing essential, so their need for dollars is strictly a comfort and living standard need; not an existential need. Other countries we have sanctioned like Iran or NK have a far more tenuous grasp on their essentials, and so NEED dollars as opposed to just WANTING dollars.

[GregT]

The oligarchs in DC can continue to play their little geopolitical game of "Risk", but in the end, there will only be one thing that matters.

Russia has oil.

[AgentR11]

Russia has surplus oil *AND* grows food calories in excess of what the population consumes.

Its why sanctions are much harder on Iran for example.

[ROCKMAN]

This could be an interesting thread. But only if folks take the time to explain exactly what they mean. Consider "Demise" in the title: exactly what the f*ck does that mean. LOL. Typical I associate that word with the death of a human being. Since Russia isn't a human being we won't see it's "demise" due to low oil prices. Fortunately we've seen some pretty good definitive post so far. We might not all agree with various interpretations and predictions. But that's OK as long as we continue to avoid "bumper sticker" comments.

My little addition is I pointed out elsewhere: “Actually, oil prices have been at an extraordinary high level in the last four years and it is not surprising that they should drop to a level closer to the historical norm,” Edward Chow, senior fellow of the Energy and National Security Program. “Since 2011, we have experienced the highest annual prices in the entire history of the petroleum industry in both nominal and inflation-adjusted terms.” Chow argues that even if oil prices fall to $80 per barrel, it would be a high price by historical standards and only mark a return to the level of 2010, before the big increase in price.”

Which explains IMHO how Russia developed that big foreign reserve cushion it has...with much held in US bonds in $'s. And another obvious point: Russia has other export revenue sources, such as from NG which is about to see its annual uptick. Lower energy costs might also allow EU consumers to purchase a bit more of other Russian exports. Improving economic conditions, thanks to lower oil prices, by a rather large group of folks who are a major market for their manufactured items might take a bit of the sting from lower oil export revenue. While 60% of Russia's export revenue comes from oil sales, 40% doesn't. And that "doesn't" part was equal to $220 billion/yr for the last stats I could find.

Speaking of trade: Russian trade SURPLUSES have been running between $14 billion to $20 billion per month this year with petroleum exports getting much of the credit. The US trade DEFICET last August was $40 billion with much of the "credit" coming from petroleum imports. Of course, that maybe one reason some folks have been predicting the "demise" of the US. LOL

[Shaved Monkey]

Oil price drop will hurt Russia, IS and shale and tar sands only Oman and Kuwait make profits at this price.

[dissident]

Oil price drop will hurt Russia, IS and shale and tar sands only Oman and Kuwait make profits at this price.

But six years ago it was assuming a minimum price of $65. Almost every freaking western government runs massive budget deficits but it's the end of Russia when it will run a deficit it can afford:

pdf link

What if oil falls? Let’s look at the effect on the budget, debt and politics using the official forecasts
from the three‐year federal budget, i.e. assuming no change in planned spending and with the ruble
moderately weaker. Against this backdrop, if the price of Urals were to drop from the average of
US$108 per barrel at which it has traded for the past three years, to an average of US$80 per barrel:

- The 2014 budget would run a deficit of US$44 bln, or approximately 2.0% of GDP instead of the planned deficit of 0.5% based on US$93 per barrel of oil.

- If Urals were to average US$80 per barrel for the next three years and based on the assumptions cited above, the aggregate budget deficit would total US$140 bln. That would raise Russia’s total foreign public debt to GDP (assuming the deficit was borrowed externally) to just above 9% of GDP.

- That deficit over the next three years would raise total public debt (domestic and foreign) to 16% from the existing 11%. That compares with an existing average public debt to GDP of 113% amongst OECD countries and over 25% for all of the major emerging economies.

- US$80 per barrel average Urals would likely lead to a ruble‐dollar rate of approximately 40.0.

The insane smugness of the western media to run around proclaiming a new era of cheap oil is simply breathtaking. The western information establishment has gone off the deep end. The current oil price drop is due to recession in key world economies and not due to some production glut.

[AgentR11]

Oil price drop will hurt Russia, IS and shale and tar sands only Oman and Kuwait make profits at this price.

You're confusing the word "profit" with the word "budget surplus". Oil is profitable for the mid east down to like $20 or something stupid like that. Russia is higher, but its still definitely profitable at $90; just not enough profit to completely fund a ridiculously fat, bureaucratic, welfare state like Russia. (They do it differently than Europe, not so nice, but its every bit as much about shelling out government funds for people to do not much of anything useful). On the other hand, Russia's domestic expenses are paid out in rubles, which again is experiencing a much lower rate of inflation than the rate of change in the ruble/$us exchange rate; if RF wasn't sitting on the dollars intending to keep them for defensive financial combat, they'd do well to buy rubles for dollars to fund their budget; basically having earned them in the 20's and exchanging them for double your money now would work pretty well.

Now, Putin could do a few different things, he's already shown his hand that he won't seriously defend the value of the ruble verses the dollar; and he doesn't seem interested in issuing ruble debt internally at unfavorable interest rates; so if there is a shortfall, it seems clear to me that he's likely to cut the welfare state fat; conservatives dislike paying people to not work in general; and there is *more* than enough fat there to cut, and more than enough political capital to do it with.

Does this equate to demise? I think not. It will be interesting watching the public sector excess lose benefits, pensions, pay rates, and/or jobs.

So yeah, Putin's oligarchs are going to get payouts in the millions from the RF to compensate for overseas seizures, and at the same time Middle Class Bob gets a pay cut. Bob will get to cheer to a great victory in recovering the Crimea and get to watch a really, really expensive bridge get built that he will have absolutely no use for! Yeah, woot! we sure showed Putin. Made him suffer guuud. Maybe Bob will get to ride a bus south in a few years and spend a day on a really beautiful beach though...

[ROCKMAN]

A - I think a better term would be positive cash flow. I think some folks get confused about how much it cost to produce oil vs what it cost to drill for it. And many badly overestimate what the LOE (Lease Operating Expense) really is. That's especially true with large fields even when they are producing a lot of "brown stained water". The advantage of scale in such fields is significant. Some folks call LOE the "lifting cost". No way to prove it but I suspect Russian lifting cost is less than $20/bbl.

A real life example: I have a well in La pumping 400 bopd. Backing out royalty and the state's obscene production tax I net 263 bopd. That 8006 bbl's/month. My LOE is $14,000/month so my lifting cost is $1.75/bbl. So if oil falls to $20/bbl I'll make a profit of $20,000/month. But it should really be called positive cash flow and not profit.

But I'm made a hell of a profit drilling that well, eh? I'm selling oil for $80+/bbl and it's costing me less than $2/bbl to produce it. Actually neither you nor anyone here has any clue if I'll make a $5 million profit or if I'll lose $2 million in the effort. You don't know what it cost me to drill that well or how much it will ultimately net me. What you do know is that I'm making one hell of a great positive cash flow. And so is Russia, the KSA, the US shale players, etc. And they'll make a PCF at $80/bbl. And at $60/bbl. And at $40/bbl.

But that doesn't mean they are making a profit on their previous drilling investment. But in the case of all the oil exporters they probably are. The US shale players? That's another matter and I won't speculate. We have enough folks here doing that already. The lifting cost is obviously a very different metric then the current finding costs. And when one tries to estimate FC that takes in much more then it cost to drill and complete a company's producing wells. It includes the cost of the drill dry holes, lease acquisition, seismic acquisition, salaries and other overhead, etc. And I've yet to see anyone document in detail those estimates for any individual company let all the companies in any play. IMHO about the best approximation we have here is shorty's work.

Yes: obviously Putin isn't pleased with the drop oil prices. But he still has a hell of lot more revenue coming in from oil sales at $80/bbl today then he was not that many years ago. Same true for the KSA. BTW my 400 bopd has already netted me more than it cost to drill so I'm in the black. Or I was until a month ago when we drilled a dry hole in the offsetting fault block. So on that project I'm still in the red. But my company has many others wells that have recovered more then they cost. But we've also drilled other dry holes. And spent a sh*t load on 3d seismic. And, of course, there's my obscene salary.

So has my company been profitable? And what does "profitable" mean anyway: a 2% ROR? A 8% ROR? A 20% ROR?
You can see why I can only chuckle when I see folks claim that companies drilling in the X trend are or aren't "profitable". In the old "depleted oil field I've drilled two horizontal oil wells another company just drilled two hz wells in the same reservoir. So is this a profitable play? My wells will make a profit so on that basis the answer is yes. But the other company lost their ass on their wells so on that basis the answer is no. Folks find it much easier to make generalizations because they don't have to back them up with the details of every effort. And that's because they don't have access to those details.

So the question again: at $80/bbl are Russia's oil exports profitable?

[Sixstrings]

I just find it interesting that after 6 years on peakoil.com, the world hasn't ended, there were no zombie hordes, I never did need any preps after all,

and we've got threads about how much the price of oil is crashing.

Lowest price in 4 years.

All the stuff that wasn't supposed to "work out" -- shale, tar sands, LNG transport, EVs -- has, in fact "worked out."

"They thought of something," after all?

So now what are the doomer threats.

Ebola and pandemic?

And it's 1960 all over again, Russian bases in Cuba and Russian bombers? And Russians talking about their nukes so much?

And -- it's the 80s all over again, too. Back then Reagan had the Saudis increase output to help crash the USSR so here we go again with that strategy. APPARENTLY there's more oil than we thought, they're able to get it flowing when they wan to crash Russia eh?

What do you guys think about that, is getting the oil price down an intentional strategy against Russia? I know it was in the 80s. But actually, I think it's incidental now, right now it's just because of all the booming US production -- we're #1, yay, we needed some kind of boost around here. How ironic it turned out to be US as a energy giant.

[Quinny]

Why should Russia give a damn about oil price in dollars when they're not allowed to spend them?

[Strummer]

All the stuff that wasn't supposed to "work out" -- shale, tar sands, LNG transport, EVs -- has, in fact "worked out."

"They thought of something," after all?

No, they didn't think of something. What's happening is that we are using up the surplus of productive capital (not money, but real capital) accumulated over the last 100 years.

Of course this was underestimated by the doomers, because it's a clear suicide path. Limits To Growth and Joseph Tainter covered this issue extensively. You can get by pretty well for a couple of years burning up the wood from forests planted by your great-grandparents or by spending the million $$$ you inherited. That's what's going on today, the financial manifestation of this process is the piles of debt we are accumulating. To continue the forest analogy, we are clearing out the forest, while making a note on a piece of paper about how we need to plant new trees sometimes in the future (debt). How long do you think can we continue to do this?

[radon1]

190 x (44-33) = 2090 billion ruble gain (assuming the ruble is allowed to slide lower if oil goes down to $75)

If this is so easy, why didn't they do this earlier, before the slide in the oil prices began?

[Strummer]

190 x (44-33) = 2090 billion ruble gain (assuming the ruble is allowed to slide lower if oil goes down to $75)

If this is so easy, why didn't they do this earlier, before the slide in the oil prices began?

Because it has a negative impact on the imported consumer goods market which makes the population angry.

It kind of balances out, the state profits, but the population suffers. However, due to the political circumstances, the "suffering" of the population is dampened by their anger at the west, who they (rightfully) perceive as the instigators of this crisis. So the net result is, I think, positive.

[dissident]

190 x (44-33) = 2090 billion ruble gain (assuming the ruble is allowed to slide lower if oil goes down to $75)

If this is so easy, why didn't they do this earlier, before the slide in the oil prices began?

Because Russia never wanted an economic war with NATO. But the world is not enough for NATO.

[Quinny]

Good illustration - makes the point I've been trying to make.

A - I think a better term would be positive cash flow. I think some folks get confused about how much it cost to produce oil vs what it cost to drill for it. And many badly overestimate what the LOE (Lease Operating Expense) really is. That's especially true with large fields even when they are producing a lot of "brown stained water". The advantage of scale in such fields is significant. Some folks call LOE the "lifting cost". No way to prove it but I suspect Russian lifting cost is less than $20/bbl.

A real life example: I have a well in La pumping 400 bopd. Backing out royalty and the state's obscene production tax I net 263 bopd. That 8006 bbl's/month. My LOE is $14,000/month so my lifting cost is $1.75/bbl. So if oil falls to $20/bbl I'll make a profit of $20,000/month. But it should really be called positive cash flow and not profit.

But I'm made a hell of a profit drilling that well, eh? I'm selling oil for $80+/bbl and it's costing me less than $2/bbl to produce it. Actually neither you nor anyone here has any clue if I'll make a $5 million profit or if I'll lose $2 million in the effort. You don't know what it cost me to drill that well or how much it will ultimately net me. What you do know is that I'm making one hell of a great positive cash flow. And so is Russia, the KSA, the US shale players, etc. And they'll make a PCF at $80/bbl. And at $60/bbl. And at $40/bbl.

But that doesn't mean they are making a profit on their previous drilling investment. But in the case of all the oil exporters they probably are. The US shale players? That's another matter and I won't speculate. We have enough folks here doing that already. The lifting cost is obviously a very different metric then the current finding costs. And when one tries to estimate FC that takes in much more then it cost to drill and complete a company's producing wells. It includes the cost of the drill dry holes, lease acquisition, seismic acquisition, salaries and other overhead, etc. And I've yet to see anyone document in detail those estimates for any individual company let all the companies in any play. IMHO about the best approximation we have here is shorty's work.

Yes: obviously Putin isn't pleased with the drop oil prices. But he still has a hell of lot more revenue coming in from oil sales at $80/bbl today then he was not that many years ago. Same true for the KSA. BTW my 400 bopd has already netted me more than it cost to drill so I'm in the black. Or I was until a month ago when we drilled a dry hole in the offsetting fault block. So on that project I'm still in the red. But my company has many others wells that have recovered more then they cost. But we've also drilled other dry holes. And spent a sh*t load on 3d seismic. And, of course, there's my obscene salary.

So has my company been profitable? And what does "profitable" mean anyway: a 2% ROR? A 8% ROR? A 20% ROR?
You can see why I can only chuckle when I see folks claim that companies drilling in the X trend are or aren't "profitable". In the old "depleted oil field I've drilled two horizontal oil wells another company just drilled two hz wells in the same reservoir. So is this a profitable play? My wells will make a profit so on that basis the answer is yes. But the other company lost their ass on their wells so on that basis the answer is no. Folks find it much easier to make generalizations because they don't have to back them up with the details of every effort. And that's because they don't have access to those details.

So the question again: at $80/bbl are Russia's oil exports profitable?

[Sixstrings]

Because Russia never wanted an economic war with NATO. But the world is not enough for NATO.

The sanctions are about the annexation of Crimea, and the Russian war in the east.

It's Russia that couldn't leave well enough alone and stop at *annexing* Crimea -- truth is, the West would have tolerated that. That should have been enough for Russia. That's actually a pretty big darn deal, annexing a Belgian-sized chunk out of a country and getting to keep it.

Last time it was tried was Iraq with Kuwait.

Russia could have ended this and kept Crimea, but no, Putin can't seem to know when he's ahead and when he should have quit before the fall.

Russia gets to keep Crimea, it should be happy with that, so really these sanctions are just about the rest of Ukraine now and the war in the east. Putin just keeps making it worse -- he's not going to shut their gas off, I'll give him that much -- but otherwise he's going to that G20 thing in Australia and talking about all his nukes. Who does that? Other than Iran and North Korea?

The sanctions are about what Russia is doing in Ukraine. Russia needs to stop it. But all Russia does is more retaliation against the sanctions.

Russia cannot sanction the rest of the world, it's the world that can sanction Russia.

If Russia keeps cyberattacking the US, then the US will just start cyberattacking back. And the NSA's quantum computers are better than Russia's. Doesn't the Russian leadership realize that? That maybe euros can get pushed around, but you can never push the US around? That Russia *cannot* win a cold war against the US?

Really Putin ought to just know when to hold 'em and when to fold 'em, and it's time to fold now and walk away with Crimea and be happy with that and don't make things worse with anymore pushing the US around with massive cyberattacks or nuclear bomber crap or whatever they're doing in their Cuba base and the new base off Alaska.

(I'm hamming it up a bit, I'm not scared of any Russian base in Cuba or all the bomber runs -- what concerns me is that Russia *thinks* this is going to work. So how much more are they going to escalate that? Because it ain't gonna work, you cannot intimidate us it just makes us mad, we can't ever be pushed around like the Brits and Europeans and Aussies.

I'm concerned Russia is going to go too far and there will be another cyberattack bigger than the last, or some other kind of incident that can't be ignored and then the US *is* going to hit back and it back a lot harder, and then I just wonder what Putin does next. It's that old cold war game of chicken again. But the US is world superpower this time and Russia has the gdp of Italy. So how will they respond when it gets serious.

I hope they back down ultimately, like Krushcev did with the Cuban missiles. USSR was a real superpower though, Russia is a smaller place now -- I hope it doesn't get into rogue state mentality and Putin and the generals go nuts and paranoid and push things too far.)

[dissident]

<snip great description of reality>

So the question again: at $80/bbl are Russia's oil exports profitable?

Since most of these Russian fields were developed during the USSR period, it is only the costs of reworking them with better extraction technology that would be the costs you have in mind. Somehow I doubt they are doing maximal contact drilling into dry zones, so I would think that Russia would be making a profit even if the oil was under $40 per barrel.

But the obsessive attention to this subject is not directly related to profitability of Russian oil production but the revenue stream to the government from taxes, etc. So the higher the oil price, the more revenue. Here $75 per barrel is a budgetary breaking point.