Russian oil is one of my favorite subjects, because when I discussed it in my book ‘The Political Economy of Oil’ (1980), I got everything right, and in my lectures at various seminars and conferences, I never hesitated to mention that I had a hard time understanding what those ‘pundits’ who got most things wrong were trying to prove.

My basic argument in that book was that “Given the comparatively small amount of exploration that has taken place in Russia in relation to its size, as well as the historical rate at which ‘Soviet’ production appeared capable of  expanding, it would be surprising if their output of oil suddenly changed direction.” The spirit of that contention is at least as true today as it was then.

In case you have forgotten, about 1980 certain oil ‘experts’ believed that Russia would be a net oil importer before many years passed. The CIA was among those who claimed that Russian oil reserves were much smaller than generally believed. What happened however was that less than ten years later, Western Siberia alone contributed almost 14 percent of global oil production, which put that region in the same category as Saudi Arabia. In addition, about the same time, several Russians informed me that their country was easily capable of producing ten million barrels per day (= 10 Mb/d), but for various reasons would never produce more. The Kings of Saudi Arabia have promised the same thing – the last time I know of being 2008 – and the approximate average in both countries at the present time is almost 10.5 Mb/d, measured over this year. It is also true that Russia has some of the largest oil and gas reserves in the world.

There are several fundamental facts that need to be understood about Russian oil. Their recent ‘strike’ in the Kara Sea – above Russia’s northern boundary – is believed to contain at least 1 billion barrels of (reportedly) super-light oil, which means that when it is refined into oil products it will feature a high proportion of gasoline and diesel. Ceteris paribus, that makes it more valuable than the oil the Russian firm Rosneft is now exporting, and Rosneft’s American partner Exxon-Mobil should also be congratulated. Congratulated because while the Kara Sea success is an enormous prize, there is almost certainly much more oil in Arctic waters, and Exxon-Mobil appears to have a preferential position in its exploitation, having been openly designated Rosneft’s “partner of choice”.

There does, however, seem to be a small problem. Ed Crooks, an outstanding energy journalist with the Financial Times, speaks in terms “tantalizing prospects” for the Russians and their American partner instead of "exciting discoveries" because sanctions imposed by the U.S. and EU ostensibly prevent the export of technology and services needed to develop the 2014 oil discovery. [The sanctions prevent Exxon from participating in the find.]

Just where did that terminology (i.e. “tantalizing”) and the antiquated idea about technology come from? If technology is the problem, the Russians will ‘sort’ it out in the fairly near future, while if necessary their Asian customers could give them the financial help they need. After all, when President Ronald Reagan organized a boycott of the compressors needed by the Russians to pump natural gas to Europe, the first Russian made compressors were ready in about 6 months, and the Chinese have recently demonstrated that they are ready and able to pay ‘present’ dollars to obtain ‘future’ oil and gas.  

In considering this new discovery of Russian oil in the Arctic, as well as the belief that where shale oil is concerned, Russia may be the best endowed country in the world, it might be useful to examine this issue from another angle. Between 1914 and 2014, global population increased by a factor of approximately six. If a similar growth rate prevails between now and 2114, neither Russia nor Exxon Mobil nor any other actual or likely oil exporter needs to be alarmed because of the possible imposition of sanctions – sanctions that a Russian government has less reason to fear than when Mr Reagan and/or his experts were making goofy suggestions to European governments that it made economic sense if they obtained the natural gas they needed from Argentina instead of Soviet troublemakers.

Put another way, this business of sanctions is little better than a sanctimonious absurdity. Edward Chow, a fellow at the Center for Strategic and International Studies in Washington, has apparently said that the American government will “not sacrifice foreign policy goals to help American businesses” but what he doesn’t realize is that the hullabaloo about the Ukraine will accelerate the movement of Russian energy exports from Europe to Asia, and as a result the burden of U.S. and EU restrictions will fall on Europe, and perhaps to a certain extent on the U.S. He also fails to emphasize that it would have been better for President Obama and his associates to deal with Mr Putin on the plane of leadership, and to patiently explain to him the offense felt in many countries by what is taking place on the border between Russia and the Ukraine than to threaten him with innocuous penalties.

Just as Exxon Mobil has been inconvenienced by the sanctions against Russia, France’s Total has been told to end its collaboration with Russia’s Lukoil in the exploration for shale oil in Siberia. This will not be a problem for Total, because as Total’s CEO Christopher de Margerie has noted, the Lukoil venture hadn’t really started, and so it has no impact on his firm. It will however have an effect on Lukoil: it will make them stronger, because it will help free them from a spurious or superfluous dependence on foreign ‘expertise’ and capital.

REFERENCES

Banks, Ferdinand E. (1980). The Political Economy of Oil. Lexington Massachusetts and Toronto (Canada): D.C.Heath.

Crooks, Ed and Jack Farchy (2014). ‘Russia curbs put Exxon’s Arctic goals on ice’. The Financial Times (October 1).