Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 451

The end of Russian oil

Think the Europeans will need to get by without Russian crude? You are 100% correct. But you are not thinking anywhere near big enough.

Most of Russia’s oil fields are both old and extraordinarily remote from Russia’s customers. Fields in the North Caucasus are either tapped out or were never refurbished in the aftermath of the Chechen Wars, those of Russia’s Tatarstan and Bashkortostan provinces are well past their peak, and even western Siberian fields have been showing diminishing returns since the 2000s. With few exceptions, Russia’s oil discoveries of the last decade or three are deeper, smaller, more technically challenging, and even farther from population centers than the older fields they would be expected to replace. Russian output isn’t in danger of collapsing, but maintaining output will require more infrastructure, far higher up-front costs, and ongoing technical love and care to prevent steady output declines from becoming something far worse.

While the Russians are no slouches when it comes to oil field knowledge, they were out of circulation from roughly 1940 through 2000. Oil technology came a long way in those sixty years. Foreign firms—most notably supermajors BP and Shell, and services firms Halliburton and Schlumberger—have collectively done work that is probably responsible for half of Russia’s contemporary output.

The Western supermajors have left. All of them. Just as the Ukraine War began, Exxon and BP and Shell have walked away from projects they’ve sunk tens of billions of dollars into, knowing full well they won’t get a cent of compensation. Halliburton and Schlumberger’s operations today are a shadow of what they were before Russia’s previous invasion of Ukraine in 2014. Between future sanctions or the inability of the Russians to pay them with hard currency, those operations now risk winding down to zero. The result is as inevitable as it is damning: at least a 50% reduction in the ability of Russia to produce crude. (No. Chinese oilmen cannot hope to keep things flowing. The Chinese are worse in this space than the Russians.) The outstanding question is how soon?

Sooner than you think. It’s an issue of infrastructure and climate.

First, infrastructure. All of Russia’s oil flows first travel by pipe - in some cases for literally thousands of miles - before they reach either a customer or a discharge port. Pipes can’t ... dodge. Anything that impedes a single inch of a pipe shuts the whole thing down. In the post-Cold War globalized Order when we all got along, this was something we could sing-song-skip right by. But with the Russians dropping cluster bombs on civilian targets - as they started doing on Feb 28 - not so much. Whether the Russians destroy the pipes with their indiscriminate use of ordinance (like they damaged a radiation containment vessel at Chernobyl!!!) or Ukrainian partisans target anything that brings the Russians income, much of this system is doomed.

Second, climate. Siberia, despite getting cold enough to literally freeze your nose off in October, doesn’t get cold enough. Most Russian oil production is in the permafrost, and for most of the summer the permafrost is inaccessible because its top layer melts into a messy, horizon-spanning swamp. What the Russians do is wait for the land to freeze, and then build dike-roads and drill for crude in the long dark of the Siberian winter. Should something happen to consumption of Russian crude oil or any of the millions of feet of pipe that take that crude from wellhead to port or consumer, flows would back up through the literally thousands of miles of pipes right up to the drill site. There is no place to store the stuff. Russia would just need to shut everything down. Turning it back on would require manually checking everything, all the way from well to border.

The last time this happened was the Soviet collapse in 1989. It took millions of manhours of help from the likes of BP and Halliburton – and thirty-two years – for Russia to get back to its Cold War production levels. And now, with war on in Ukraine, insurance companies are cancelling policies for tankers carrying anything Russian on Seas Black and Baltic while the French seize Russian vessels, and the Russian Central Bank under the strictest financial sanctions ever, it is all falling apart. Again.

Even in the sunshine and unicorn scenario that Putin duct tapes himself to a lawn chair and throws himself into a pool, and a random band of kindly kindergarten teachers take over the Russian government, we should not expect the energy supply situation in Russia to begin to stabilize before 2028, and for us to return to what we think of as the status quo before 2045.

In the meantime, the debate of the moment is expanded energy sanctions. Once everyone concludes that Russian crude is going away regardless, there’s something to be said about pre-emptively sanctioning Russian energy before reality forces the same end result. Moral high road and all that. Bottom line: Uuuuugh! The disappearance of some four to five million Russian barrels of daily crude production will all by itself kick energy prices up to at least $170 a barrel. A global energy-induced depression is in the wind.

But probably not an American one. In the bad ol’ days before World War II there wasn’t a “global” oil price. Each major country or empire controlled its own production and maintained its own - sequestered - market. Courtesy of the American shale revolution and preexisting legislation, the U.S. president has the authority to end American oil exports on a whim and return us to that world. An American export ban would flood U.S. refiners with relatively cheap shale oil. Those refiners will certainly bitch - their facilities have a taste for crude grades different from what comes out of Texas and North Dakota - but having a functional price ceiling within the United States of roughly $70 a barrel will achieve precisely what Joe Biden is after: cheaper gasoline prices.

The rest of the world? They’ll have to grapple with losing Russian and American crude at the same time. If the “global” price stays below $200, I’d be shocked.

The first rule of geopolitics is place matters. To populations. To transport. To finance. To agriculture. To energy. To everything. The second rule is things can always get worse. The world is about to (re)learn both lessons, good and hard.

 

Peter Zeihan, founder of Zeihan on Geopolitics, is a geopolitical strategist, speaker and author. This article is general information and does not consider the circumstances of any investor. This article is an adapted excerpt from Peter's upcoming book The End of the World is Just the Beginning.

 

  •   23 March 2022
  • 3
  •      
  •   

RELATED ARTICLES

Oil and the storm before the really big storm

Oil does not have a supply side problem

Future oil prices: it takes two to contango

banner

Most viewed in recent weeks

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Latest Updates

Investment strategies

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Retirement

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

The ASX is full of broken blue chips

Investing in the ASX 20 or 200 requires vigilance. Blue chips aren’t immune to failure, and the old belief that you can simply hold them forever is outdated. 

Shares

Buying Guzman Y Gomez, and not just for the burritos

Adding high-quality compounders at attractive valuations is difficult in an efficient market. However, during the volatile FY25 reporting season, an opportunity arose to increase a position in Mexican fast-food chain GYG.

Investment strategies

Factor investing and how to use ETFs to your advantage

Factor-based ETFs are bridging the gap between active and passive investing, giving investors low-cost access to proven drivers of long-term returns such as quality, value, momentum and dividend yield. 

Strategy

Engineers vs lawyers: the US-China divide that will shape this century

In Breakneck, Dan Wang contrasts China’s “engineering state” with America’s “lawyerly society,” showing how these mindsets drive innovation, dysfunction, and reshape global power amid rising rivalry. 

Retirement

18 rules for ageing well

The rules to age successfully include, 'the unexamined life lasts longer', 'change no more than one-eighth of your life at a time', 'nobody is thinking about you', and 'pursue virtue but don’t sweat it'.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.