Source: www.asiaecon.org |
RUSSIA: OIL PRODUCTION, PRICE FLUCTUATIONS AND THE COUNTRY'S ECONOMIC RECOVERY
Russia is the second largest oil producer and exporter. It provides about 12 percent of the global oil production and export.Oil, natural gas, metals and timber account for more than 80 percent of Russian exports and according to the IMF and World Bank estimates, the oil and gas sector in the country generated more than 60 percent of Russia’s export revenues (64% in 2007) and accounted for 30 percent of all foreign direct investment (FDI) in the country.
In 2007, Russia’s real GDP grew approximately 8.1 percent, making it the country’s seventh consecutive year of economic expansion. The country’s economic growth during the 2000-2007 period was primarily driven by energy exports, given the increase in Russian oil production and relatively high world oil prices during the time period.Russia’s economy is heavily dependent on oil and natural gas exports. Over 70 percent of Russian crude oil production is exported, while the remaining 30 percent is refined locally. crude oil exports via pipeline fall under the exclusive jurisdiction of Russia’s state-owned pipeline monopoly, Transneft. Oil price fluctuations are a significant concern for the Russian economy, since it funded a significant portion of the economic boom in Russia. In order to cope with price volatility, the government established a stabilization fund in 2004. By the end of 2007, the fund was expected to be worth $158 billion, or about 12 percent of the country’s nominal GDP.
When oil prices fell below $40 a barrel in the winter of 2008 government advisors began thinking of ways to encourage the country to steer away from oil and diversify its economy.
Currently, prices are over $60 a barrel. Oil prices are increasing steadily and are predicted to continue increasing. How does this affect or benefit Russia’s economy?
When oil prices increase rapidly, Russia’s economy initially flourishes. For each $1 increase in the price of oil, Russia’s government budget earns about $1.7 billion a year, according to Yulia Tseplayeva, the chief economist for Merrill Lynch in Moscow. However, in Russian history, the two periods of most intensive economic change were preceded by long slumps in oil prices. Its dip from an 8 percent growth in 2008 to a 6.5 percent contraction in 2009 is considered the “most extreme of any major economy in the global slowdown”.
Falling oil prices are particularly bad for Russia. A large part of the country’s GDP comes from exporting its vast supply of crude oil and gas. Falling prices of oil may have other sever consequences for Russia, including a possible devaluation of the ruble and a severe drop in living standards. The decline in oil prices from $147 in July 2007 to below $50 today blew a large hole in the government’s budget calculations. It is now facing a $150 billion shortfall in its spending plans and so far is has cut expenditures in 2009. Chris Weafer, an analyst with the Moscow brokerage Uralsib has said that the country’s dependence on oil exports has made Russia’s economy is more vulnerable than other countries.
Russian crude oil is mainly sold to markets in Europe and the U.S, according to Reuters. Both countries were hit hard by the recession, government taxation and substitution policies to reduce oil consumption. This has made Russia expand its oil production to Asia-Pacific, where energy demand is increasing rapidly. Also, the proximity to large emerging economies such as China, South Korea and Japan make Russian crude oil prized for its quality and trade efficiency to those growing markets.
Oil prices are expected to increase as the global economic recovers. This might once again fuel Russia’s recovery in the short term. Economists predict that Russia’s losses from the global financial crisis may be balanced off by the upswing in oil prices. Nouriel Roubini, professor of economics at New York University, said yesterday that oil prices may rise to $70-75 a barrel by 2010. This is ideal since Igor Sechin said that prices need to continue a modest surge in order to sustain production.
Uralsib analyst Mikhail Zanozin said “if the average oil price is $70 a barrel, taking into account the state’s revenues from the mineral extraction tax and export duties, the budget will get an additional $19.5 billion,” he said. “So if the price is $75 per barrel, one may count upon as much as $26 billion.
Source: www.asiaecon.org |
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