Russia became the world’s biggest producer of crude oil in 2009, with an average output of 10.0 million barrels per day (b/d). For the first time since 1991 it overtook Saudi Arabia, which cut back its production as a result of OPEC quotas to stabilise oil prices in the economic recession.
Energy is a key component of GDP and government revenues in both countries, while Russia’s increased output and influence has global geopolitical and strategic implications.
- Saudi Arabia has traditionally been the world’s largest producer of crude oil, a position which it occupied since 1991. However, Russia overtook it in 2009, producing an average 10.0 million b/d compared to 9.7 million b/d in Saudi Arabia;
- Saudi’s crude oil production declined in 2009 by 10.6% as it applied quota cuts imposed by the Organisation of Petroleum Exporting Countries (OPEC), after global oil prices fell from US$133.4 per barrel in July 2008 to US$39.1 per barrel in February 2009 (West Texas Intermediate spot price) due to lower demand amid the global recession. Russia is not a member of OPEC so it increased production in an attempt to win market share and bolster government finances;
- Despite Russia overtaking Saudi Arabia, the latter has much larger proven oil reserves and greater production capacity, at 12.5 million b/d, meaning that Saudi Arabia could retake top place if it pumped at full output, whereas Russia is already producing close to 100% capacity;
- Energy is a major component of GDP in both countries: in 2009 it accounted for 59.8% of GDP by origin in Saudi Arabia and an estimated 25.0% of GDP in Russia. However, lower oil prices during the economic recession in 2008-2009 have affected government revenues and GDP growth;
- There are important geopolitical implications for Russia’s emergence as the top crude oil producer, particularly with regard to energy security in Western Europe. Russia is also the world’s biggest exporter of natural gas, which places it in a strong position to use energy as a political or strategic asset. This has prompted calls for some countries to diversify their energy supply to other sources and regions.
- Russia produced an average of 10.0 million b/d of crude oil in 2009, some 1.5% more than in 2008, as it increased production from new fields in Siberia and attempted to offset declining oil prices by raising output. In 2009 it accounted for 12.9% of world crude oil production;
|Production (millions of tonnes) / % of world total crude oil production|
Source: Euromonitor International from BP Statistical Review of World Energy.
- In contrast, Saudi Arabia’s oil production fell from 10.8 million b/d in 2008 to 9.7 million b/d in 2009 as the country reduced its output following quota cuts issued by OPEC, the oil cartel, in an effort to stabilise falling global oil prices. This meant that Russia became the world’s largest crude oil producer for the first time since 1991;
- Furthermore, Saudi Arabia’s proven oil reserves at the end of 2009 are by far the world’s largest, at 264.6 billion barrels (19.8% of the world total) compared to 74.2 billion barrels in Russia (5.6% of the world total);
- Saudi Arabia completed a major capacity expansion programme in 2010, which brought the kingdom’s total annual crude output capacity to 12.5 million b/d including a zone between Saudi Arabia and Kuwait. This means that Saudi has a very large surplus production capacity which is currently idle, and could effectively become the world’s top producer again if it chose to pump at full capacity;
- In general, major energy producers are important as they tend to attract significant foreign investment, can create sizable amounts of local jobs and generate considerable related business opportunities. Energy-rich countries also tend to have financial resources to invest heavily domestically, for instance in infrastructure or transport, and also manage sovereign wealth funds to invest overseas.
Price movements and quotas
Oil production and output capacity have significant implications for a range of world commodity prices and inflation:
- The global recession of 2008-2009 had a sharp impact on oil demand and prices, as major energy consumers such as the USA and China required less crude oil thanks to the economic slowdown, and speculators began to bet that oil prices would fall. Average oil prices recovered to around US$75 per barrel in September 2010;
- Oil prices affect the cost of many other goods and services for consumers and businesses, especially transportation, domestic fuel and utilities. Inflation worldwide was 6.2% in 2008, when oil prices peaked, but fell to 2.6% in 2009 partly as a result of lower oil prices. By increasing local money supply and investment, high oil prices can also impact inflation in oil producers: in Saudi Arabia inflation reached 9.9% in 2008 but fell to 5.1% in 2009, partly due to oil price fluctuations;
- In an effort to stabilise prices, OPEC decided in 2009 to impose a series of cuts on its members, which were implemented to varying degrees. Saudi Arabia has traditionally been the ‘swing’ producer, meaning that as the largest exporter it can have the largest impact on production output (and theoretically prices). Saudi Arabia and several other OPEC producers chose to make substantial production cuts to help stabilise prices in 2009 and prevent them dropping further;
- Russia is not a member of OPEC and instead increased its production to take advantage of stabilising prices and to gain market share. This has highlighted the difficulty for OPEC to maintain control of oil prices in times of peaks and troughs, especially as other producers such as Indonesia and Brazil are not members.
|US$ per barrel (West Texas Intermediate spot price)|
Source: Euromonitor International from Economic Observer
Government revenues and growth
- Crude oil is the main driver of the Saudi economy, with mining and quarrying of energy producing materials accounting for 59.8% of GDP in 2009 and an estimated 85% of government revenues, according to national statistics. Saudi Arabia was in a stronger position to withstand lower oil prices than Russia, due to financial reserves it developed in previous years: the budget surplus in 2008, for instance (when oil prices were high), was US$149 billion according to national statistics;
- Russia was much more exposed to the banking and financial crisis, as well as a consumer spending downturn over 2007-2009, which it partly tried to offset by increasing crude oil output. Russia’s GDP shrank in real terms by 7.9% in 2009 whereas Saudi’s grew by 0.1%;
- Thanks to the reserves built up in previous years, and despite the sharp downturn in output in 2009, the Saudi government is implementing a record level of expenditure in an effort to offset the impact of the recession. Its 2010 budget envisages spending of US$144 billion, with a focus on infrastructure-related projects;
- Oil exports account for a significant share of export revenues in both countries with Saudi Arabia and Russia the world’s largest exporters of petroleum and petroleum products in 2009. However, over-reliance on energy can lead to other sectors being neglected. Saudi Arabia is attempting to diversify its economy, especially into industry and manufacturing. Russia’s economy is more diversified, with industry playing a major role, but state revenues remain highly reliant on earnings from oil and gas exports, and hence oil price shocks.
- The rise of Russia as the world’s pre-eminent energy producer has caused alarm in some quarters, particularly as Russia has sought to use this position for political and strategic gain. Russia is Europe’s single largest energy supplier and there are fears over price increases or supply problems. There have been several disputes over gas prices with Ukraine, for instance;
- Both countries are attempting to export more oil to China where oil demand is rapidly increasing to keep up with rapid economic growth. Over 2004-2009, China’s crude oil consumption had risen by an annual average of 4.9% whereas in the USA it fell by an annual average of 1.9%;
- In August 2010 the first section of a new pipeline was opened, connecting Siberia with China and allowing Russian oil easier access to the Chinese market. Similarly, China is the fastest-growing international export market for Saudi Arabian oil according to national statistics;
- Both Saudi Arabia and Russia remain attractive places for certain types of foreign businesses, especially those in the energy sector, whilst their financial reserves make them potential sources of investment for overseas businesses. Consumers in both countries are to some extent detached from the energy sector, which is largely state-controlled, although benefit from public-sector spending on infrastructure and transport.
Russia is expected to remain the world’s top oil producer in 2010, although Saudi Arabia is also expected to pump more crude than in 2009. Global oil demand will depend partly on the economic recovery, but will largely be driven by fast-growing economies such as China and India, whose economies are expected to grow by 10.5% and 9.4% respectively in 2010, compared to global economic growth of 4.5%.
The IMF predicts that global oil prices will average US$80 per barrel in 2010 and US$83 per barrel in 2011, compared to US$62 per barrel in 2009. The higher prices will benefit the major oil producers, with Russia set for real GDP growth rebound of 4.3% in 2010 and Saudi Arabia 3.7%. Both are expected to seek to diversify their economies, although arguably Saudi Arabia is in a stronger position to do this thanks to its political structure.
Thanks to the impact of the recession, and of output expansion programmes such as in Saudi Arabia, there is significant unused production capacity and another major oil price spike is unlikely in the near future, although opinions vary on the longer-term.