Taking Advantage of High Oil Prices

With oil prices sky high and some predictions that they will continue to grow to as much as $200 over the next 6 months or more – one might think that oil producing countries are celebrating.  Higher demand for resources – higher profits!  Right?

Well, it seems like some can’t really keep up,

In the past, non-OPEC producers like Russia, Mexico and Norway have increased production to meet demand.  But these nations have struggled to keep production at the levels of recent years.  Norway’s production, for example, has decreased by twenty-five percent since two thousand one. 

Russia, at one point the largest oil producer, has not been able to sustain its production levels and has seen its output decline over the past six months.  One of the reasons behind this, according to the Economist, is quite simple and predictable — a poor business climate:

“Tax is the major impediment,” says Ms Redman. The government levies an export duty of 65% at prices over $25 a barrel. Add to that various corporate, payroll and production taxes, oilmen complain, and the state creams off as much as 92% of profits. Executives at TNK-BP have argued that rising costs across the oil industry will make many investments in Russia unprofitable unless the tax regime is changed. As it is, TNK-BP accounts for a fifth of BP‘s production, but only a tenth of its profits.

Someone may argue that its simply a good strategy – keep production limited to sustain high prices.  It doesn’t make sense, however, if one takes into the account just how dependent the Russian economy is on oil and other natural resources.

The share of oil and gas in Russia’s gross domestic product has more than doubled since 1999 and now stands at above 30%, according to the Institute of Economic Analysis, a think-tank. Oil and gas account for 50% of Russian budget revenues and 65% of its exports.

Perhaps the declining production is signaling a new era in Russia.  The country has reached its natural resource potential in generating growth and now faces a dilemma – put in place real reforms to spur growth in other sectors or remain tied to oil and gas. The incentives to change the business climate are there.  The promises are there too.  Its time for the new old leader to act.