The Future of the Russian Oil Industry

Abstract

The fall in oil prices precipitated by the recent global financial crisis has made the fate of the Russian oil industry increasingly precarious, which in turn has made Russia’s economic and political future quite uncertain. Much of the perceived success of the Putin government has been a direct result of the high oil and gas prices in the early 2000s, from which Russia gleaned enormous windfall and trade profits. Now, with oil prices at their lowest levels in years and with the depletion of hard currency reserves, Russia’s economy is suffering. At the same time, Russia’s relationships in the international community, particularly with the US and EU, have become strained in part due to the 2008 conflicts with Ukraine over natural gas pricing that left much of Central Europe without heat during a record cold winter. The Russia-Georgia conflict also remains a significant point of contention. The potential costs of these political and economic difficulties include a greater likeliness for Europe to construct additional LNG terminals with alternative pipelines to bypass Russia and great declines in investor confidence in Russian industry. Under present conditions, lower oil prices and increasingly limited access to international credit markets will make it difficult for the Russian government to maintain current levels of oil production. This paper explores the possible political and economic consequences of various courses of action that Russia might take in addressing the crises at hand.