Another shoe drops

Yesterday the price of oil exceeded $113 per barrel. Today the Financial Times included an article to the effect that Russia had reached its peak in output last year and would likely not exceed that production level in the foreseeable future. Another production peak heard from. According to the article, Leonid Fedun, of Lukoil, estimated that a trillion dollars would be needed in new exploration and development investments to sustain last year’s level of production for the next 20 years. I suspect Mr. Fedun is an optimist.

Is this another symptom of the decline in global oil production or is it just an anomaly of the Russian situation? Maybe it’s a little of both. Lukoil is Russia’s largest independent oil company, not yet having been absorbed by the Russian government. It appears that the government, in Soviet-like fashion, has been busy de-privatizing the large oil companies and subsequently decreasing their productivity. So part of the waning production may be due to incompetence on the part of these companies. The fact that non-Russian oil companies are staying away in droves, having been roundly squeezed by the Putin regime, doesn’t help. So political meddling may be one factor in the reported peak in production. Yet Lukoil is still a private company so the production problems may be more basic: the remaining oil in the ground is playing harder to get.

Thus we have the following situation: for whatever reason, Russia’s oil production has peaked, possibly permanently. To maintain production at this peak level significant investment will be required. In order to justify said investment it’s likely the price of oil will need to increase. That means that $4.00 per gallon of gas is just a milestone on the long upward path. Also keep in mind that Venezuela is trying to copy the Russian model by nationalizing its oil companies. Russia is the world’s second largest oil producer; Venezuela is the eighth. Between them they produce more than 12 million barrels of oil daily.

Let the good times roll?

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