6 min read

Back to the grind...

Back to the grind...
Now that production increases are on and Biden wants OPEC to pump more, we're back to producer politics

Hello! The newsletter will resume in earnest on the daily schedule starting on Monday and I'll be tweaking the format as I go, but still focusing on daily analytic digests and longer-form analysis that I intend to intersperse with more things like aggregating a bunch of links and reading recs for specific topics on top of the additional content I'm hoping to branch into – book review style essays, guest posts, more climate change content, eventually more consistent content on issues like parliamentary politics with regular contributors, and so on. I plan on putting out my first post on Ghost for paid subscribers on Friday. It'll be a book review of Putin's People by Catherine Belton that aims to bring a lot of other work into dialogue with her narrative, consider the political economy implications, and push back on what the text is doing (though it's a fantastic read and I highly recommend it). In parallel, I plan on doing a post about Afghanistan over the weekend that'll be available to everyone before launching back into the newsletter format on Monday. Note that all past Substack posts have migrated to Ghost as well. Now for some housekeeping.

Having completed the subscriber migration from Substack, I'll be canceling my account on it later this week. There is no way to directly adjust the costs of the subscriptions held over from Substack because they're attached to specific codes on Stripe, the backend payments platform that Substack uses and with which Ghost is compatible. That means that in order to adjust the rate to the higher one I'm moving to – $8/month or $75/year with the same standing offer of an 80% discount for any academic .edu accounts – you'll have to resubscribe. Obviously that's a pain but there doesn't seem to be another way around it. So in the spirit of the initial idea I had to grant anyone with a monthly subscription a 3-month window at a discounted rate as well as waiting for any annual subscriptions to roll over, I've decided the simplest way forward is to let you keep your current subscriptions at the old cost through the end of this year. Come January, I'll start canceling subscriptions on the backend and ask that you resubscribe at the new rate. I'll provide near constant reminders starting at the end of November as a heads up and will also reach out by email to anyone who hasn't done so by January before doing anything. It'll be time consuming but I think it's both fair and a bit easier logistically than worrying now since I wanted to provide a grace period anyway. Anyone who has not yet paid will have to do so at the new rates in order to access all of the content instead of just Friday newsletters, one non-newsletter post a month, and the occasional piece reacting to really big news, guest post, or else something intended to circulate and drive up subscriptions. When I do links and reading roundups, I intend to provide those for everyone as well.

August is always a bit of a dead month when it comes to news in Europe, Russia being no exception. The only thing that caught my eye the last few days coming back from Chicago came from finanz.ru. Citing a TASS release that draws on Rosstat data, the ruble cost of extraction per barrel of oil has nearly tripled since 2012 and risen 15% in USD terms. Year-on-year production costs per ton more than doubled for April-June reaching $15.60 a barrel, a far cry from Rosneft's love of self-reporting $3-5 a barrel costs for investors while claiming higher costs with the state to reduce the tax burden. A napkin calculation puts the ruble cost per ton around 1,146 rubles on an exchange rate basis. By inference, that puts the 2012 cost around 382 rubles or a bit less – using the average exchange rate, that would have been about $12.30 a barrel. These distinctions get a bit tricky since so much of the equipment, tech, and expertise the oil sector consumed were dollar denominated and that's only begun changing in recent years but that's a huge divergence for cost increases on a comparative basis. What's also crucial here is that so much of the price increase occurred in just the last year. Why? Because the oil sector hasn't replaced enough extracted oil with new reserves in the last few years and, more importantly, the average extraction costs are rising more quickly as hard-to-reach reserves take up a larger and larger share of the national resource base. After all, something like 65-70% of oil output received tax breaks or related support of some kind by 2019-2020 before MinFin repealed a range of them last fall as part of its anti-COVID austerity push. The story caught my eye cause of an exchange from last week on Twitter with Mike Kofman. To simplify, his basic contention is that Russian oil output hasn't peaked despite MinEnergo claiming it likely has and will be a function of market demand rather than supply.

But relative costs matter, as do the physical location of reserves and firms' willingness to explore. The 2001 oil tax reform removed a series of exemptions and breaks for exploration on the tacit agreement that the state would finance Rosgeologiya to do all of the hard work so that firms could just show up buying licenses and extract away. That never panned out effectively, and became a more noticeable drag on output after 2008-2009. Most of the production increase after Crimea came from horizontal drilling and improving recovery rates, but even improved, Russian firms regularly report rates in the range of 25-30%. They lag Saudi Aramco, Equinor's offshore prowess, and most IOCs. Demand matters, and I think is closer to tipping into decline than oil bulls believe. However, supply isn't a function of simply having oil in the ground. It has to be accessible, recovered at an adequate rate, not taxed too highly, and so on. Any attempt to maintain a budget surplus post-COVID when consumer demand is increasingly debt-financed and real income recovery is very likely exaggerated by state data will lean more on extractive sector taxation, hence no likelihood of major tax reforms before 2024 at the earliest. Output has probably peaked because production costs are rising, reserves aren't being replaced quickly enough (though this might change), and Saudi Arabia, Kuwait, and the UAE are all plannng output increases at a time of continued demand uncertainty. Kofman's point when I engaged him was that if taxes are the problem, then the issue isn't "structural." Well, when other producers and the cumulative effects of underinvestment into exploration catch up with you and mess up your plans, it is. Demand's no longer growing forever. In fact, Biden's aim to make EVs half of all autosales in the US by 2030 could shave off 1.5-3 million barrels a day in demand in the US alone. Adoption rates in China are rising faster and the EU is ahead of the US market. So that's millions of barrels of gasoline/benzine demand vanishing from key demand centers ahead of past projections at a time when emerging markets that have driven demand growth for decades – non-OECD oil demand overtook OECD oil demand in 2013 – are structurally slower, thanks in no small part to China's economic imbalances. OPEC's latest 2022 demand forecast appears to be predicated on a complete recovery for jet fuel and air travel:

There are tons of moving parts at the moment, but those demand figures seem a little rosy to me since US recovery – let's assume for the sake of argument that a large reconciliation bill with a lot of social spending passes – can only push up demand so much. In Western Europe, there's not really room for demand growth anymore and they're still underspending considerably to properly create growth. Long story short, peak oil demand is probably in the next few years (by 2024-2025) and yes, the struggle to increase Russian output above 2019 levels is structural in nature due to the cost of reserves and their location as much as fiscal policy and countless other factors. There's no easy policy fix, especially when you're still depending on oil taxes, don't want to increase taxes on households, and are likely ceding ground to cheaper producers as demand on your two main export markets slows.

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