Posted this week by Tom Whipple

 

Last week the New York Times focused in on Moscow’s efforts to keep its economy afloat in an era of extremely low oil prices. Back in the days of $100 oil, the Russian government got about $74 from every barrel sold; $15 went to production and shipping costs; leaving about $11 in profits for the oil companies. Now with around $30-40 a barrel, Moscow now gets only $17 or so a barrel and with production costs steady at $15 oil company profits are down to $3 a barrel.  With half of Russia’s federal revenue coming from oil sales, the drop from $74+ to $17 has been a disaster. To many Russian officials, the only answer is higher taxes on the oil companies.
 
The problem is that the Russia’s aging oil fields require constant capital injections to explore for and drill new wells; otherwise production will begin to wither away. A recent Russian energy report estimates that production would fall by 50 percent in the next 20 years unless large amounts of capital are spent on finding more oil and drilling more wells.
 
The Kremlin is currently considering a new tax on oil companies to be taken from the meager $3 a barrel profit they are currently earning.  While this would hold Russia’s budget together in the short run, in the long run it is the equivalent to eating its own seed corn and the results will be disastrous for the oil industry.
 
Some believe that Russia is at an economic/political crossroads. The government desperately needs large amounts of money to support its military establishment to the extent that it can meddle in the Middle East and confront the West. It also needs large amounts of money to keep its Islamic peoples under control and to support rising unemployment as its economy contracts.
 
Moscow is currently engaged in provoking confrontation with the West to raise nationalist feeling among its peoples during the current economic downturn. Without the oil revenues Russia would deteriorate into a second or third rate world power which is anathema to its leaders’ self-image.  Much of Russia’s future and relations with the West is riding on the oil tax decision which will be made soon.

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