Time consistency and the economics of Russian oil

The status quo ex ante seems to be unraveling:

“The oil companies are not investing at all in exploration of new deposits because profits on these projects will only come in 10 years. Nobody will invest in these projects.”

Of course the Russian government may end up resorting to an expropriation.  So why invest? But that seems to make the need for an expropriation all the more urgent:

There is little doubt that Russia needs the money now, and that the oil companies provide an enticing target. Because they are paid in dollars but conduct their domestic business in the battered ruble, Russia’s oil majors have lots of cash. While globally most oil companies are deep in the red, cash reserves industrywide in Russia remain at an estimated $90 billion, a deep and tempting pool for the strapped Kremlin.

Yet this is exactly the worst time for trust to collapse:

…oil deposits discovered and developed in Soviet times are nearing depletion. The country’s oil future, like that of the United States, lies in offshore and shale projects that are more expensive to develop.

Do not expect a stellar outcome:

A study leaked from the Ministry of Energy, seen as allied with the oil industry, and published last week in the business daily Vedomosti, presented a doomsday scenario. Russia, the analysis predicted, could cease to be an oil power, with output plummeting to half the current level by 2035.

It is always interesting to look at past history:

It would not be the first time oil entered a spiral of declining volumes and rising demands from the state. Short of cash in an oil price downturn in the late Soviet period, the Kremlin squeezed the oil industry. It was deprived of capital, at the time, for such things as imported machines.

Output in what is today the Russian Federation fell to about 8.8 barrels in 1991 from about 11 million barrels a day in 1988…

Here is the NYT piece by Andrew E. Kramer.


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