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Miller’s Prediction and Output Problems

Carl Mortished of the Times has a new piece about $250 oil and the relationship to Gazprom’s output problems. He writes that although “the Russian firm enjoys scaring Westerners; it is ill at ease with its enormous wealth, and bears a grudge of embarrassment over the criticism it suffered in its clumsy handling of a dispute with Ukraine.” Mortished writes that the prediction conceals nervousness that the winning streak is coming to an end.

But the key to Gazprom’s warning is Russia, and its failure to continue raising its oil output. The steady rise in Russian oil output over the last decade has almost single-handedly fed the ravenous growth in demand for crude in China. Without Russia, China’s economic boom would probably have stuttered to a halt several years ago. But the output growth rate is now fading fast and voices have been raised within the Russian oil fraternity that 10 million barrels per day may be as far as it can go. Russian oil production has declined for five months in a row to less than 9.5 million b/d. The IEA is still reckoning 10 million b/d for the year, an optimistic forecast given the turmoil at one of the country’s biggest producers, TNK-BP, where a power struggle is being waged between BP, several oligarchs and, again, Gazprom.

Western investors are making ever more frantic warnings about Russia. Rex Tillerson, Exxon’s chief, said recently that there was little confidence in the rule of law in Russia, and Tony Hayward, BP’s chief, gave warning that the world’s energy problems are political, not geological.He is partly right and he speaks from recent experience. The oligarchs with whom BP shares ownership of its Russian affiliate have suborned Russia’s regulatory and judicial system to gain the upper hand in a dirty battle for control of TNK-BP. Gazprom is waiting in the wings to see which side emerges triumphant. Either way, the state will take a large slug of the asset and in the meantime TNK-BP’s oil output languishes.Still, BP’s plight would not be so great if it had many more irons in the fire. Oil output is not growing anywhere much. Three quarters of OPEC’s meagre spare capacity of two million b/d is in the hands of Saudi Arabia. If Russia were found to be pumping at the limit of its potential – whether for geological, technical or political reasons – where should we turn?That is scary stuff. Back in Deauville Mr. Miller beats his drums, but the bravado about $250 per barrel conceals a great deal of nervousness. It’s great to be a player on a winning streak with a big pile of chips. But when the casino manager breaks out in a sweat as he watches the game over your shoulder, you might get a bit scared too.