The energy news from Russia is not so encouraging. Rumors are emerging from Russia that its crude oil output may have peaked. This news is another reason why crude oil prices soared last week. According to the International Energy Agency (IEA), Russian oil output fell last quarter, for the first time in a decade. The IEA reported that Russia's crude oil production averaged about 10 million barrels a day last quarter, a 1% drop compared to the first quarter of 2007.
Declining production from one of the world's largest oil exporters puts further pressures on an already strained oil market and adds to the potential for higher prices for the global economy. Global production constraints, combined with surging demand in emerging markets, rising oil-field expenses and political instability in Africa, the Middle East and Venezuela is anticipated to keep crude oil prices high, especially during the summer months, when gasoline demand is high.
Oil industry observers and Russian officials generally blame the country's production slowdown on a combination of weather and tight electricity supplies in some parts of the country. A longer-term concern is the aging of the Siberian fields that once dominated Russian production growth. Some Western analysts deny the decline and point to optimistic data and forecasts. Citigroup said in a report last month that it expects Russian oil volumes to increase by 1.5 million barrels a day between now and 2012, largely due to new projects in eastern Siberia. However, the Citigroup report also cautioned that "Russian oil production growth is no longer to be taken for granted."
The IEA predicts Russian oil production will rise again later this year. However, the IEA estimates an annual increase of only 0.8% over 2007, compared with an average increase of 2.5% in the past three years and much faster growth in previous years. Russia's energy ministry says it expects a rise of 1.8%. However, earlier this month, Yuri Trutnev, Russia's natural-resources minister, said on state television that the country's full-year 2008 production may be lower than in 2007. Leonid Fedun, the 52-year-old vice-president of Lukoil -Russia's largest independent oil company - recently said that he believed last year's Russian oil production of about 10 million barrels per day was the highest he would see "in his lifetime." Fedun compared Russia with the North Sea and Mexico, where oil production is declining dramatically and said that in the oil-rich region of western Siberia, "the period of intense oil production is over."
Russia's production slowdown highlights a troubling reality, namely that despite soaring oil prices in the past five years, crude oil output from nations outside the Organization for Petroleum Exporting Countries (OPEC) has remained essentially flat since 2005. As a result, the normal link between high crude oil prices and increasing oil production has been disrupted. Now, we rely on new finds (as in Brazil), but these huge new discoveries will take several years to come online.
