The Peter Zeihan Podcast Series - How Stable Is the Russian Oil Industry?

Episode Date: February 14, 2023

The big news from the weekend is that Russia announced a plan to cut 500,000 b/d (barrels per day) of oil production. This accounts for about .5% of global supply and roughly 10% of Russian oil exports.Full Newsletter: https://mailchi.mp/zeihan/how-stable-is-the-russian-oil-industry

Hey everyone, Peter Zine 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 one percent of global production, and roughly 10 percent of Russian exports. Now, for those of you 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 in 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 took 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, probably, 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 break-even 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 is taken away half of the buffer. We're not to the point we're going to see permanent shut-ins, but we are not all that far away. Oh, yeah, and that reminds me that all this talk of oil and disruption and Russia and the Ukraine war,

is going to be part and parcel of what we're going to be covering this Friday in our seminar about the economic impacts of the war one year round. We'll not be limited to oil and disruptions. We'll hit natural gas. We'll hit industry. We'll hit a number of raw commodities, whether it's chromium or aluminum or nickel. We're certainly going to get into agriculture and the entire supply chain that makes our world function. Show you where there's some durability, where things don't look so good and everything in between.

You can get that information right here in this email. and I will see you there.