Russia, the world's second biggest exporter of oil after Saudi Arabia, averaged production of 10 million barrels per day during the first three months of this year -- a 1% drop in production when compared to the same period in 2007, The Associated Press reported Tuesday, citing International Energy Agency data.
Aging infrastructure or aging fields?
Analysts, oil industry executive, and economists will now begin the painstaking process of determining the exact cause of the production shortage. Russia has suffered from electricity shortages and poor weather conditions in oil production zones during the past year. In addition, despite Russia's impressive, 5-year economic boom and related development -- an economic expansion driven to a considerable degree by Russia's oil revenue -- the nation's oil infrastructure remains inadequate and in need of up to $50 billion in improvements and upgrades.
Independent energy trader Jim Dietz said if the current production drop stems from weather problems or infrastructure deficiencies, the oil market will largely overlook the decline, as a temporary dip.
However, if the source is declining production from Russia's aging Western Siberian oil fields, "that would place further upward pressure on oil's price," he said. On Tuesday, oil closed at $113.74 per barrel -- a new record-high close. Oil had traded as high as $113.99 earlier in the session.
Every drop counts
A non-OPEC member and a possessor of more than 60 billion barrels of proven oil reserves, the oil market is counting on Russia to increase production by at least a modest 1-2% amount annually -- part of the so-called 'spare capacity' that the world needs to meet increasing global oil demand, Dietz said. The largest spare capacity in the world is held by OPEC member Saudi Arabia.
Moreover, even though oil markets are not counting on much additional oil from Russia, strong economic growth in Asia and Latin America has increased global oil demand to such a degree that even a modest subtraction from the 'spare capacity' equation can have a major impact on oil's price, Dietz said.
"In another time, 10 years ago, with modest oil demand, Russia's problems wouldn't affect prices that much," Dietz said. "But we're in an oil-challenged world right now, and there isn't a great deal of supply coming online to meet rising demand, so every production increase means a lot. And so does every production decrease."
Closing Bell: Can't go up every day (BAC, HE, HPW, COMS, BRCD, WMT, AMD)
Wal-Mart grows profit and cash flow in Q3, but comps still ailing
Chasing Value: Ten stocks for 2010 -- Part 2
