What does it cost to slow down oil production in the US?

2 february 2016

The Analytical Center has published another issue of its Energy Bulletin entitled ‘Oil Production: Set to Go Down?’ Experts analyzed the global oil market and its tendencies while excessive supply continues to be a factor, the prices are going down, and production by exporting countries including Russia keeps going up.

How quickly can the growth of potential mining resources outside the four Arab kingdoms of the Persian Gulf slow down? Or when can the balance between offer and demand be restored? The expert’s conclusions are based on their own research and the forecasts of leading international agencies, which deal with the decreasing investments in new oil and gas projects around the world and the freezing of some existing projects in this field.

Russian oil companies are currently concerned with cutting costs and wondering how long they need to postpone new investments. This has a huge impact on Russia whose total investment in the energy sector amounts to about 6% of its GDP, while globally it is just above 1% of the world’s GDP. So far the companies have abstained from making any major changes in their investment policies, just postponing selected projects for a short time. For instance, the performance of licensing obligations under some promising projects has currently been delayed (e. g. Yurubcheno-Tokhomskoye oil field of Rosneft, Kuyumbinskoye oil field of Slavneft, both postponed by one year).

At the same time, the analysts are seeking to answer a critical issue: to what level the costs of shale oil production can be brought down in the US? While in the past few months OPEC has been seen as the main ‘offender’ in undermining the stability of the global oil market, the main argument for the cartel’s policy sounds convincing enough: if they try to limit oil production quota while the prices are not too low, this may well result in failure, because the reduced production will be replaced by oil from other countries, first of all the US.

So the task of seeking stability in the oil market may be worded as follows: how low should the prices be for the growth of oil production in the US not to exceed the growth of demand again, as it happened in 2014? It is this calculated price that is likely to help reach equilibrium in the midterm.

The Bulletin also discusses the question of whether it is advisable to allocate government budget money to support specific industries and projects and whether it is the best and the most efficient use of the funds. Which industry (or which project) produces the largest multiplication effect and brings the largest benefits to the country’s economy?

Ukrainian politicians keep stressing that there is no need for Ukraine to buy gas from Russia, and they are aiming to do away with natural gas imports altogether in the next 10 years. The Analytical Center’s experts are looking at the situation in the current heating season, the transformations in Ukraine’s gas industry and its prospects.