All day today commentators have noted that the Russian economy is doomed. They are probably right. At least in the next few months, I don't see how Russia can avoid a lot of economic misery. But there is one saving grace for the Russian economy: the break-even cost of extracting American shale oil.
The main reason that the Russian economy is tanking is because the price of oil is currently around $55 per gallon. Although few people think of Russia as having a hydrocarbon-based economy like Saudi Arabia, that is effectively what they are. Over the long term, Russia has two paths out of this mess: diversifying its economy so it is not so dependent on oil prices (which is really really hard, and may be impossible as long as it is under so many sanctions for its shenanigans in Ukraine), or for oil prices to go up. The latter will happen eventually, we just don't know when. Except that there might be something already at work that will bring oil prices up.
Part of the reason for cheap oil is that a lot of new oil is now available on the international market because of new oil production in the Alberta and in North Dakota. Those oil operations rely on newer (and more polluting) techniques like hydraulic fracturing (i.e. "fracking"). As a result, it cost more to extract that oil than it does to use an old fashioned well in the Arabian desert or the Siberian steppe. The break-even point for U.S. and Canadian shale oil varies by oil field, but the average is around $60 per barrel. The price of oil is already below that point, and if it falls below $46 per barrel, that would render virtually all North American shale-oil production unviable.
As the low oil cost continues, many if not all North American shale oil operations will go offline. (That is essentially what the Saudis are betting on right now) That will limit the supply of oil and cause the cost per barrel to go up, which will boost the Russian economy. The problem for Russia is that as soon as it goes above $60-80, the U.S. sources will go back online and Russia needs oil to trade at about $100 per barrel to pay its bills. So while the odds are good that North American sources will go idle, that probably won't be enough to entirely bail out Russia, although it may ease the pain a bit. What Russia really needs to get out of the woods is something else to happen to make prices really spike again. That could happen, but it is hard to see what would do it any time soon.
The main reason that the Russian economy is tanking is because the price of oil is currently around $55 per gallon. Although few people think of Russia as having a hydrocarbon-based economy like Saudi Arabia, that is effectively what they are. Over the long term, Russia has two paths out of this mess: diversifying its economy so it is not so dependent on oil prices (which is really really hard, and may be impossible as long as it is under so many sanctions for its shenanigans in Ukraine), or for oil prices to go up. The latter will happen eventually, we just don't know when. Except that there might be something already at work that will bring oil prices up.
Part of the reason for cheap oil is that a lot of new oil is now available on the international market because of new oil production in the Alberta and in North Dakota. Those oil operations rely on newer (and more polluting) techniques like hydraulic fracturing (i.e. "fracking"). As a result, it cost more to extract that oil than it does to use an old fashioned well in the Arabian desert or the Siberian steppe. The break-even point for U.S. and Canadian shale oil varies by oil field, but the average is around $60 per barrel. The price of oil is already below that point, and if it falls below $46 per barrel, that would render virtually all North American shale-oil production unviable.
As the low oil cost continues, many if not all North American shale oil operations will go offline. (That is essentially what the Saudis are betting on right now) That will limit the supply of oil and cause the cost per barrel to go up, which will boost the Russian economy. The problem for Russia is that as soon as it goes above $60-80, the U.S. sources will go back online and Russia needs oil to trade at about $100 per barrel to pay its bills. So while the odds are good that North American sources will go idle, that probably won't be enough to entirely bail out Russia, although it may ease the pain a bit. What Russia really needs to get out of the woods is something else to happen to make prices really spike again. That could happen, but it is hard to see what would do it any time soon.
