Russia Refusing to Adjust for Greater Good

Friday, September 04, 2015

“If oil prices stay low longer enough, supply will go down naturally.” This, according to Arkady Dvorkovich, Deputy Prime Minister of the Russian Federation, is the theory driving Russia’s decision to not cut oil production. Russia intends to continue to flood the global oil market with their vast supplies even as the oil supply is already outstripping demand.

With the price drop, not only is Russia continuing steady production and output, officials have made it clear they intend to preserve its own supply and opt to primarily provide its consumers imported fuel. This means Russian consumers are paying more to fuel their cars. But on the same token, the country is building a hedge against the global market, stockpiling their reserves.

In an interview with CNBC News, Dvorkovich went on to say “no one wants excessive instability in the oil markets and most of the [OPEC] participants are better off when (oil) is like $60 per barrel.” He made it clear Russia will be keeping production high and will do nothing to help correct the market, as the officials see this as the most efficient stabilizer for the market.

In response to the economic principle, this approach is actually making a bad situation worse, Dvorkovich responded “One way we can adjust for that is stop providing excessive tax preferences (tax breaks) for companies who mine heavy oils, expensive oils. At this point we are not doing that. We continue to provide those preferences, given the budget constraints.”

Russia is a top oil producer, consistently in the top three global oil producers. Unlike most countries with oil supplies, Russian officials don’t seem to realize the gravity of the situation and are seemingly ignoring the basic principles of supply and demand. US oil companies, for example, have been forced to decommission about 40% of the rigs fully functioning no more than two years ago thanks to prices having dropped 50% since June of 2014. Most producers around the globe are making adjustments in the hopes oil prices will stabilize and hopefully increase, except Russia.