Russia's Oil: What's It Mean for the U.S.?

Aug. 26, 2006 — -- Recent reports suggest Russia has overtaken Saudi Arabia as the world's largest oil producer, a fact that at first glance could have dire consequences if U.S. companies and consumers become more dependent on Russian oil. But first glances can be deceiving.

Statistics recently published by the Organization for Petroleum Exporting Countries show that Russia is currently extracting slightly more oil than Saudi Arabia, making it the biggest oil producer in the world, according to a recent story in the Financial Times. Both countries produce slightly more than 9 million barrels of oil per day. The OPEC statistics show that in June 2006 Russia extracted 9.236 million barrels a day, about 46,000 more than Saudi Arabia.

The United States is the world's largest consumer of oil, accounting for about 20 million barrels per day of the world's 86-million-barrel output. At a time when oil supplies are tight and price fluctuations regularly squeeze consumers, Russia's emergence has implications for the oil market.

U.S. and Russian relations have cooled recently as Moscow asserts its independence from Washington. The country's leaders have distanced themselves from the Bush administration and become more aggressive creating political alliances with anti-U.S. states like Venezuela.

So as Russia's oil-fueled economic recovery puts the country on more solid footing. Will American companies and the government find themselves overly dependent on a Russia that is no longer a geopolitical ally?

Probably not, or at least not financially, say oil industry sources.

The transportation pipeline from the Middle East -- from Saudi Arabia in particular -- to the United States, involving supertankers that ship to refineries in the Gulf of Mexico, is much more established than anything between the United States and Russia. Because of this, it's unlikely U.S. companies and importers will immediately become more dependent on Russian oil.

"The logistics of getting Russian oil over to the U.S. are difficult because of infrastructure issues," said John Parry, an oil analyst with John S. Herold. "In reality, because of the function of the market, oil finds its most economic destination. Russian oil is going to find a home in eastern Europe first."

Extra Production Needed, From Anywhere

Worldwide, oil consumption has grown faster than production over the last decade. In the late 1990s, the world consumed about 80 million barrels of oil per day and produced about 85 million. The daily surplus of 5 million kept the market in check in the event of a shortage.

Today worldwide consumption is closer to 85 million barrels, and production levels hover near 86 million, leaving a surplus of only about 1 million barrels per day. The shrinking surplus has made markets much more volatile and prone to price spikes when production levels falter, as they did when refining capacity went temporarily off-line after Hurricane Katrina last fall.

According to Parry, the world needs to continue finding sources of oil, regardless of the geopolitical philosophies of the source country.

"If anything, it's welcome, because there's so little surplus in the world right now," he said. "Russian oil is not going to compete with Saudi Arabia right now because of the infrastructure issues and because the world needs as much oil as it can get."

What About U.S. Oil Producers?

American-produced oil has been increasingly shunned by the largest refining companies because older U.S. fields make it hard to extract oil. The process can take longer and is often more expensive than simply importing it from the Middle East, said Jeff Johnson, chairman and CEO of Cano Petroleum, a Texas-based oil company that focuses on U.S. oil extraction.

It stands to reason that any addition to the world supply coming from foreign markets would put even more price pressure on U.S. producers. But Johnson said U.S. companies are unlikely to change their tactics.

"I don't think it will change the game much," he said. "We need to focus on producing as much oil as we can, onshore in the U.S., and the domestic companies will continue doing that."

He noted that production levels have declined over the years in most oil-rich countries, including Saudi Arabia. Any extra production, be it from Russia or elsewhere, will likely replace the declines from traditional oil exporters.

"Right now, we're at about 86 billion barrels, and I really don't think we're going to get much higher than that because so much of that production is already in decline," he said.

That could keep the price pressure in check, both for consumers buying gas at the pump and American companies competing with foreign-produced oil.

"Bringing on more oil production is a good thing because we need all the supply we can get," Johnson said.