Time to worry about the stability of Russian oil production

Hey everyone, Peter Zeihan here coming to you from my home away from home, the Denver Airport. It is the 13th of February and the news over the weekend is that the Russians have announced a near imminent plan to cut 500,000 barrels a day of oil production, which comes out to about one half of 1% of global production and only 10% of Russian exports. Now, for those of you who have been watching me for a while, you know that I’m really concerned about the stability of Russian production, not just because of the war, but because of their geology. Most oil production comes from the permafrost. And if there’s a situation where the crude can’t flow, whether because people aren’t taking the crude away at their export points, or because they shut it to themselves, the crude in the wellhead freezes into gel, and the water that comes up as a byproduct freezes into ice and it pops the wells from the inside and repairing that damage the last time around to 30 years. 

And last time, most of the oil services firms were part of the process, this time they’re gone. So if we do lose Russian oil production for any reason, it’s not just gone, it’s gone for a very, very, very long time. And that is not priced into the market at all. Now, the 500,000 is probably not a problem. The Russians have about a million barrels per day from their western fields that are not in the permafrost. And so they can shut those in and bring that back on and shut it in again and bring it back online. In fact, they did this in the early weeks of the war last time when people weren’t taking their crude. Well, now we have a couple more things in play. 

The European oil ban is in place, the European refined products ban is in place. It’s not technically illegal to buy or ship these products, but you have to do it without European insurance or vessels if it’s under a certain price point. And that is reducing demand for Russian product around the world because they’re having a hard time getting the stuff out. Also, the breakeven price for a lot of Russian crude is between 40 and $60 a barrel. And now that the prices that the Russians can charge are under that threshold, the Russians don’t have an economic incentive to pump the stuff in many cases. So 500,000 has taken away half of the buffer. We’re not to the point where we’re going to see permanent shut-ins but we are not all that far away. All right. That’s it for me. Until next time. Bye