A confidential document of the Russian Energy Ministry draws an alarming scenario, the end of oil reserves by 2035. With oil prices at current levels, oil companies pay very few taxes and do not invest in research. If this continues, Moscow could no longer support the current military spending and will have to give up the dream of being a superpower.
The leaked, published by the Russian paper Vedomosti, has been confirmed by sources of the same ministry. If the price doesn’t rise, the confidential document says, by 2035 Russia will run out of oil. The reserves known to date have an estimated life of up to twenty years, while the price of crude oil around $ 30 a barrel has so thinned the profits that oil companies find uneconomical to invest in search for new deposit.
For an economy smaller than Italy’s and based exclusively on oil, it is a blow. In fact, the study is the symptom of an alarm widespread among the Russian elite. According to the Moscow Times, Putin is thinking of a new tax on oil producers. A desperate and dangerous move. But the scenarios outlined by the experts are even worse.
Less and less money
The numbers are merciless. According to a calculation made by the New York Times, when oil was sold at about $ 100 a barrel, the Russians oil companies poured some $ 74 to the state in taxes. Now that $ 35 are enough to buy a barrel of crude oil, the amount paid to the Treasury is just $ 17. And the experts say the price will remain so low in the coming years.
Russian economy literally relies on the export of energy, which accounts as much as 65% of the entire exports and 35% of national GDP. To get an idea of the dependence of the Russian economy from the sale of oil and gas, just think that the multi-annual budget break-even is set to a price of crude oil at $ 100 per barrel. And the price of gas, the other main Russian export good, is pegged to oil price.
In terms of profits, the situation is even worse. During the fat days, for every barrel the companies pocketed $ 11, net of extraction and delivery costs. Now the profit has dropped to a mere $ 3 per barrel. The oil companies are not going to invest in the search for new fields, convinced that the money invested will not return even in the next ten years. The paradoxical effect is that agreements, like the recent one reached in Doha, to freeze the current production levels, will be thwarted by the collapse of production, estimated in 46% by the Economy Ministry document.
Meanwhile, investors flee. Vitol, one of the world’s largest commodities trading company based in Switzerland, has recently sold all of its Russian assets.
The weight of sanctions
With price as the current one the numbers don’t add up. Military spending – now the third highest in the world in relation to GDP, even more than the United States – will not be sustainable, and the Kremlin will have to choose between cutting it, giving up the dream of being a superpower, or break down the already weak welfare, with high risks of internal instability. The picture is very similar to that of the last years of the USSR, when the military and space spending sucked 60% of GDP and the price of oil reached a record low. According to some historians, it was real cause behind the fall of the USSR.
It is unlikely that the history repeats, but the consequences of the combination of negative factors should not be underestimated. And they know it at the Kremlin. The new tax on oil producers, who is reported to be discussed in the Ministry of Finance, is a double-edged sword. The cash of the oil companies are still fat. But further cleaver on their future earnings could trigger an even more negative spiral.
One more not secondary detail is hidden in the folds of the Energy Ministry document. Among the variables that could reverse the negative trend, as well as an unlikely increase of the oil price and the tax policy, the best scenario includes the lifting of international sanctions. It means that sanctions are biting hard, even if the Russian propaganda repeats they’re harmful. And that the West can play its role in containing Russian revanchism.
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A confidential document of the Russian Energy Ministry draws an alarming scenario, the end of oil reserves by 2035. With oil prices at current levels, oil companies pay very few taxes and do not invest in research. If this continues, Moscow could no longer support the current military spending and will have to give up the dream of being a superpower.
The leaked, published by the Russian paper Vedomosti, has been confirmed by sources of the same ministry. If the price doesn’t rise, the confidential document says, by 2035 Russia will run out of oil. The reserves known to date have an estimated life of up to twenty years, while the price of crude oil around $ 30 a barrel has so thinned the profits that oil companies find uneconomical to invest in search for new deposit.
For an economy smaller than Italy’s and based exclusively on oil, it is a blow. In fact, the study is the symptom of an alarm widespread among the Russian elite. According to the Moscow Times, Putin is thinking of a new tax on oil producers. A desperate and dangerous move. But the scenarios outlined by the experts are even worse.
