Russia is one of the largest hydrocarbon producers in the world. How much oil Russia exports in the future will affect global supply.
The United States, the European Union, and other nation states have recently imposed economic sanctions on Russia in response to Russian aggression in the Ukraine.
These sanctions have not immediately restricted the export of Russian oil and gas but do raise concerns about future disinvestment by global companies in Russian exploration and development.
Effect of Sanctions and Chinese Pivot on Russian Oil Exports
Russia currently exports approximately 5 million barrels of crude oil and nearly 2 million barrels of refined products per day. Currently shipped mostly to Europe, Russian hydrocarbon exports have recently pivoted towards China.
The current global crude oil price does not appear to reflect much short-term concern about the effect of sanctions or Russian’s pivot towards China. The Brent contango market state may reflect some longer term concern about this effect on European consumers.
While Russian oil exports to China does likely reduce Chinese appetite for oil produced elsewhere, the effect on the global free market price may be muted by currency exchange reality.
Ruble, Yuan, and Dollar
Global oil prices are generally payable in US dollars. Sanctions and the recent decline in the price of oil have reduced the value of the ruble.
While a weaker ruble does mean that Russia realizes more rubles per sale of a barrel of oil at a dollar price, the weaker ruble means that more dollars have to in turn leave Russia to pay for imports and repay debt denominated in dollars.
In addition, the Chinese pivot likely means that more Russian oil will be paid for in Chinese yuan. The yuan does not trade as freely as the dollar, so yuan held by Russia could depreciate in value as determined by the Chinese government.By paying in yuan, China may in effect gain access to cheaper Russian oil which could induce greater consumption. If China increases consumption beyond current projections after taking into account increased Russian imports, then overall demand for dollar priced crude should increase.
Russian Oil and Gas Workforce
The North American unconventional revolution has created a generational shift change as the industry seeks to find and train new workers.
Russian oil and gas executives list lack of a skilled workforce as the second largest obstacle facing the industry.
Unlike the United States, Russian does not appear to attract and train new workers into the industry. The recent economic sanctions are now causing younger Russian entrepreneurs to leave the country.
Russia enjoys a highly educated workforce but its working-age population is declining by a million people a year.
Current, and possibly growing, sanctions on the Russian economy, the currency effect of the Chinese pivot, and the decline in the Russian working age population may well reduce Russian crude oil exports in the long term.
Your Turn
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Tom Morgan
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