Falling oil prices over the last 18 months have without a doubt had a negatively impact on the Russian economy. The 3.7 per cent drop in the country's GDP in 2015 and the further decrease that is expected in 2016 greatly concern Russia's leaders.

The only sectors of the economy that demonstrated growth in 2015 are agriculture and the mining industry.

The Russian ruble continued to follow fluctuating oil prices, and its value in relation to leading world's currencies is still over 75 per cent less than two years ago. World Bank data shows that in 2015, the financial situation of 2.8 million Russian citizens has deteriorated to such an extent that they are now living below the poverty line.

Oil production in Russia hit an all-time high of 533.5 million tonnes in 2015. In 2014, oil exports grew by 8 per cent to 241.3 million tonnes. Due to an acceptable debt load, low production costs (on average $10–15 per barrel for Bashneft and Rosneft) and flexible taxation, Russian oil companies can withstand a long period of low prices, even though it is not desirable. Without enough oil income, however, the state finds itself in a far more complicated situation. To maintain its social obligations, federal budget spending was increased by 2.2 per cent of GDP in 2015, while revenues fell by 2.6 per cent of GDP. The country's savings also went to finance social spending. Over the last two years, the Central Bank of Russia's international reserves have decreased by over $150 billion. Russia's sovereign wealth fund has decreased by 16 per cent. These resources went to finance a series of projects, for instance, Yamal LNG ($2.4 billion).

The biggest problem for the Russian oil industry is the need to carry out intensive geological exploration. To maintain current production levels and replace their depleting reserves, oil companies need to produce 150,000 barrels per day at new oil fields. Current prices are not conducive to expanding geological exploration. Companies are cutting capital spending. For instance, in 2015, Lukoil reduced its capital costs by 10 per cent, while Gazprom Neft made cuts of 26 per cent. The number of new oil wells dropped by nearly 20 per cent in 2015. A series of nationwide projects have slowed down or else are spinning their wheels. As a result, Eastern Siberian oil fields are achieving their planned production capacity later than scheduled. The construction of the Skovorodino–Mohe pipeline, a branch pipeline of the Eastern Siberia–Pacific Ocean oil pipeline, is being delayed because of China.

In February 2016, President Putin suggested privatizing seven large state companies, including Rosneft and Bashneft. Selling the state's shares will provide the government with up to 800 billion rubles. However, it is unlikely that Rosneft will be privatized, as neither its current top management nor BP (its largest foreign investor) are interested in doing so. Bashneft is one of the fastest-growing oil-producing companies in the country. It managed to overcome the negative consequences of nationalization in 2014 and increase its production in 2015 by 12 per cent (this is why Lukoil and Surgutneftegaz are so interested). It is possible that government measures could be directed at the energy sector as well, with the aim of maximizing state revenues. The increase in gasoline excise duties has already been approved, and now increased taxation of oil production can be added too.

Saudi Arabia has long been in competition with Russia for the title of the world's leading oil producing state. It depends greatly on its oil revenues: oil accounts for 80 per cent of the state revenues and 45 per cent of the country's GDP. Riyadh has unmatched opportunities on the world oil market. While most oil producing countries are working at their full capacity, Saudi Arabia can increase its output by 2 million barrels in short order. The Kingdom's flexible energy policies, coupled with the fact that Iraq has been trying to deal with the consequences of war, were the main factors that led to the increased supply in the oil market over the last two years. And this is why there are excess supplies today.

Saudi Arabia has gigantic oil reserves. As of 2015, the country had 267 billion barrels of technically recoverable oil (about 18 per cent of the world reserves). Production costs in Saudi Arabia are among the lowest in the world, at about $5–10 per barrel. This is why even with current prices, Saudi Aramco – the national oil company – will retain its competitive edge. However, the country's budget did suffer greatly, as did that of Russia.

In 2015, the budget deficit in Saudi Arabia was almost $100 billion, or about 15 per cent of its GDP. Although Riyadh has monetary reserves of about $650 billion accumulated through national welfare funds, King Salman's government is seriously concerned with the economic prospects under long-term low oil prices. To make up for the foreseen budget deficit of $87 billion, the Kingdom's budget plans to privatize education, healthcare and the military industry, as well as Saudi Aramco.



A relatively low VAT of 5 per cent is expected to be introduced at the end of 2016, for the first time without any relation to religion.

January 2016 saw the first steps taken to "correct" subsidies for the supply of water, electricity and oil products, including a 50 per cent increase in gas prices. In the future, these measures could cause discontent and resistance on the part of the population. This is an unprecedented step for a country where King Salman, following his coronation, distributed $32 billion as gifts among the population.

Saudi Arabia has already been forced to return to the long-forgotten practice of borrowing finances. After a significant depreciation of the riyal, investors might begin to panic, and such a development is fraught with negative consequences for the economy. The Saudi riyal is still tied to the U.S. dollar (around 3.75 riyal to the dollar), and it makes consolidating state finances even more complicated. Nevertheless, Riyadh has enough leeway to manoeuvre due to its low debt load (5 per cent of the GDP) and the fact that it has many state assets that can be privatized.

With the persisting low oil prices, King Salman will be increasingly faced with an almost impossible trilemma. King Salman faces an extremely difficult trilemma: he must maintain the Kingdom's share of the oil market, stop Iran from increasing its influence in the Middle East, and stimulate an increase in oil prices. Riyadh is unlikely to succeed with all three of its goals, but even partial success will depend on its flexibility and its negotiating capabilities. King Salman showed that he was willing to actively influence the situation on May 7, 2016, when he dismissed Minister of Petroleum and Mineral Resources Ali Al-Naimi, who had held the key post in the Saudi economy since 1995. Al-Naimi sought to maintain the country's oil production levels and avoid a repeat of previous failures such as the 1986 oil crash, when a decline in production cost one of Al-Naimi's predecessors, Ahmed Zaki Yamani, his job as Minister of Petroleum and Mineral Resources of Saudi Arabia (Al-Naimi was head of Saudi Aramco at the time). The new post of Minister of Energy, Industry and Mineral Resources of Saudi Arabia, created as part of an ambitious project to transform the Saudi economy, has been filled by Khalid A. Al-Falih, former Minister of Health and Chairman of the Board of Directors at Saudi Aramco.

The reform programme implemented as a way to overcome the negative effects of low oil prices developed by the 30-year-old Deputy Crown Prince and current Minister of Defence of Saudi Arabia, Mohammad bin Salman Al Saud, includes integrating all energy sectors of the economy into one ministry and privatizing 5 per cent of the country's national petroleum company, Saudi Aramco. The ultimate goal is to diversify the Saudi economy, reduce the oil industry's overall share of the country's GDP (it is hoped that Riyadh will be able to increase non-oil revenue almost fourfold by 2020, to $160 billion), and establish the country's largest ever investment fund with capitalization of $2 trillion, in order to develop new sectors of the economy.

Despite the scale of the planned reforms, it is unlikely that Riyadh will change its course with regard to international oil markets.

Riyadh has no interest in reducing oil production in order to balance supply and demand on the global market, and it will continue producing oil at the limits fixed in February 2016 (between 10 and 10.1 million barrels per day). In 2008, with the deepening financial crisis and plummeting global demand, the Kingdom decreased its output by 1.5 million barrels per day. Today, with the growing global demand and increasing regional rivalry, Riyadh will not make any concessions. What is more, against the background of the recent structural changes, the head of Saudi Aramco has promised that the company would see "significant growth" in its annual oil production, thus demonstrating a willingness to take extreme measures in order to preserve the company's market positions.

The shale revolution allowed the United States to increase its production to almost the same level as that of the leading energy states, Russia and Saudi Arabia.

After many decades of being dependent on foreign oil, the United States started to seriously discuss the issue of becoming an oil superpower.

When oil prices began to grow again after the global crisis began in 2008, this fact propped up an unprecedented spike in oil production in the United States: it grew by more than 1 million barrels per day in 2013 alone. However, the shale revolution of the late 2000s to the early 2010s is in danger of coming to an untimely demise due to falling oil prices. In 2014, the average annual West Texas Intermediate benchmark was $93.28 per barrel. In 2015, it had fallen to just over half of that amount ($48.71 per barrel).

In 2015 alone, low prices led to a 40 percent cut in capital expenditure in the U.S. shale sector, with around 100,000 people losing their jobs. Half the shale oil companies are on the verge of bankruptcy. Investments into exploration and production have dropped by 25 per cent, and the number of drilling rigs in operation has reached an all-time low (since December 2009). Leading U.S. oil companies have made major cuts in their capital expenditures for 2016. Chevron suffered losses of $4.1 billion in 2015 and cut costs by 24 per cent. Similarly, ExxonMobil has cut costs by 25 per cent.

The shale revolution has created jobs – employment growth has been observed in those states where shale oil is produced. Striving to offset the negative trend, the states try to compensate for lost revenues. For instance, the government of Alaska is now considering (for the first time in 35 years) introducing income tax to make up for its $3.5 billion budget deficit. It should be noted that in 2015, oil revenues in Texas and North Dakota, which are leading oil producing regions, dropped by 49 per cent and 43 per cent respectively. Production costs even at the model oil fields of Bakken and Eagle Ford fluctuates at around $50–65 per barrel, which is $20–30 above current oil prices. Even the oil production costs on standard fields (Bakken in North Dakota and Eagle Ford in Texas) hover around $55–60 per barrel, which is $15–20 higher than current oil prices.

It should also be noted that in many aspects, conventional oil fields have an advantage over shale oil fields; shale oil fields have lower recovery ratio and depletion rates are many times higher. An average shale oil field demonstrates oil output drop of 70–90 per cent after a year of oil production.

Therefore, in order to counterbalance the dropping shale oil production, US oil companies will have to drill 9,000–10,000 new oil wells annually. This is hardly practicable under current conditions.

The decrease in US oil production that started in April 2015 will continue in 2016. According to IHS, US oil production will drop to 8.6 million barrels per day by the spring of 2016. However, the decrease in shale oil production will not lead to a long-term decline in oil production in the entire country. By the middle of 2017, average oil prices should reach $50–60 per barrel, and then oil production at the largest US shale oil fields (Eagle Ford, Permian and Bakken) will start to grow again. As shale oil fields deplete, oil production will return to the traditional southern regions. Developing several deep-water fields in the Gulf of Mexico (St. Malo, Tubular Bells, Lucius and Heidelberg) will secure the United States' status as the leading energy state in the Western Hemisphere. Those fields which were initially exploited when oil cost upwards of $100 per barrel are in the waters of Texas and Louisiana, which also have major refineries.

However paradoxical it sounds, it is the actions of the President's administration that can get in the way of the development of the US oil industry.

President Obama submitted the 2017 budget to Congress in February 2016, which plans to introduce an oil production tax of $10.25 per barrel. The White House intends to use the revenues to finance alternative energy sources on the domestic market. The Republicans in Congress will most likely vehemently oppose this step. It is obvious that the prospects for the US oil industry will depend, among other things, on the outcome of the 2016 presidential elections.

China is among the world's largest energy consumers, accounting for 40 per cent of the oil consumption growth in 2000–2010. At the same time, China holds leading positions in oil production. When it peaked in 2015, production in China reached 4.3 million barrels per day, more than in such oil superpowers as Venezuela and Iraq.

Although China is the world's fourth largest oil producer, oil does not play a crucial role in the country's economic development.

As China's economy is becoming industrialized and modernized, the share of oil production in its GDP dropped from 3 per cent in 2006 to 1.2 per cent in 2015.
The oil produced in China is used exclusively on the domestic market, and even with such large-scale production, it is not enough for China's rapidly developing economy.

China buys 6 million barrels of oil per day and is the world's largest oil importer.

China has a tradition of using oil for medicinal and military purposes that goes back thousands of years. The country became a net importer of oil in 1993, and since then the gap between consumption and production has grown exponentially. Given the ever increasing number of cars in the country and the economic growth rate, which is twice the global average, it would be fair to say that China's dependence on oil imports will exceed the current level of 62 per cent.

The drop in oil prices to $35–40 per barrel overlaps with the expected trend of the gradual production decrease at Chinese oil fields, most of which are in their late stages of exploitation. Today, about 80 per cent of oil is produced on land, but production will move to the offshore reserves in the South China Sea. Exploitation of the Daqing and Shengli oil fields (the largest in China) began in the 1960s, and despite new technologies used to increase oil recovery, the output of these fields will inevitably decrease. Several new fields (for instance, the new reserves discovered in the 2000s in the Bohai Sea in Northeast China) do not have the qualitative characteristics of the gigantic oil fields on land and require additional geological exploration. Therefore, when exploiting the new reserves, China will have to face territorial claims and objections against Beijing's expansionism from Japan, Vietnam, the Philippines, Malaysia and other countries, as well as the negative price environment, since the average cost of production at the new fields is upwards of $40 per barrel.

The state controls China's three principal oil and gas companies – China National Petroleum Corporation (CNPC), China Petroleum & Chemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC) – which account for 90 per cent of oil production in China. Therefore, they cannot use the standard reaction to an unfavourable economic situation (redundancies) and instead cut capital costs. Despite the lack of transparency in their operations, it became known that in 2015, both CNOOC and Sinopec simultaneously cut production and capital costs.

Oil production in China is expected to decrease by 100,000–200,000 barrels per day in 2016, and this trend will become all the more evident as long as oil prices remain low.

Today, Canada is the world's fifth-largest oil producer and has the third-largest oil reserves (after Saudi Arabia and Venezuela). The growth of the Canadian oil industry is based on bituminous (tar) sands, that is, hillside sands covered with bitumen, clay and water (95 per cent of the country's oil riches). Canada has 2 trillion barrels of bituminous oil reserves, yet due to its high viscosity and the resulting technological difficulties, only one eleventh of the reserves is recoverable. At the same time, the advantage of tar sands is that the shaft method can be used to produce oil, since the oil reserves are close to the surface.

In 2000–2015, Alberta saw a tar oil boom, with production skyrocketing to 2.2 million barrels a day. On the whole, as of 2015, Canadian oil production, taking into account conventional oil fields in Saskatchewan and Newfoundland, amounted to 3.7 barrels per day. Despite low oil prices, oil production in Alberta will continue to grow and reach 3 million barrels per day, since several projects are at the final stages of development.

The current prices of $40-45 per barrel correspond to the production costs at the fields already being exploited. According to IHS, shaft production method costs fall within this range, and with steam injection for heating and viscosity reduction the costs do not exceed $30 per barrel.

Therefore, current prices are no threat to the viability of the projects already in operation.

However, world prices must be about $60 per barrel to start production on new steam-gravity wells. Therefore, it can be expected that those projects where development has just started will be delayed indefinitely.

President Obama's refusal to construct the Keystone XL pipeline will also impact short-term energy prospects in a negative way. The pipeline was intended to transport Canadian tar oil along the Gulf of Mexico to U.S. oil refineries, which are well-suited for the integrated refining of heavy crude oil. There are other ways to transport oil from Canada to the United States (for instance, about 200,000 barrels are shipped daily via railways), but they are not as cost-efficient. According to IHS, the pipeline would have made the cost $8–10 cheaper per barrel.

Today, the world's cheapest benchmark for oil is Canadian synthetic crude Western Canadian Select; the lack of capacities for optimizing and diversifying exports impacts pricing negatively.

It should be noted that Canada ships over 3 million barrels of oil and bitumen to the United States per day, while the export of similar resources to other countries does not even amount to 30,000 barrels per day. The 2015 depreciation of the Canadian dollar in relation to the U.S. dollar can make Canadian exported goods, particularly oil and oil products, more attractive. Yet it will not solve Canada's long-term energy problems.

Although the decrease in oil prices has not yet been reflected in the oil production figures, its negative influence is already being felt by the Canadian economy. During 2015, as the costs were cut (on average by 11 per cent), local oil companies laid off 40,000 workers. This figure may grow five-fold if the current prices hold. The oil boom in Alberta created a significant ripple effect. Yet, given the 30 per cent share of the oil industry in Alberta's gross regional product, it is unclear how Canada will handle the consequences of the negative trend. In the 2000s, full-fledged oil towns appeared there. Over the last ten years, the population of Wood Buffalo which is close to the Athabasca heavy sands oil field nearly tripled and reached 110,000 people. With all the lay-offs and capital cost cuts, such towns must be maintained. Given the fact that oil and gas revenues in the province of Alberta have dropped by 85 per cent over the past fiscal year alone, and that unemployment has risen to 7 per cent during the same period, the only way to keep the situation under control is to build up debt and increase taxes. Alberta's debt is expected to increase threefold over the next three to four years, to $58 billion, despite the increase in income tax and the introduction of a tax on greenhouse gas emissions.

Thirteen years after the U.S. intervention in Iraq and more than two years after ISIS appeared on its territory, Iraq remains the second-largest oil producer in OPEC, and the sixth-largest oil producer in the world. The development of the Iraqi oil industry over the last decade has largely been determined by war and the resulting impossibility of developing the economy under normal, predictable conditions. Oil became the life saver of Iraq's statehood: today, oil production accounts for about 50 per cent of the GDP and about 90 per cent of the state's revenues. It is apparent that Baghdad's excessive dependence on global energy trends is here to stay.

In 2010–2015, oil production in Iraq, with the exception of Kurdistan and other territories controlled by Kurds, grew by 1 million barrels per day (reaching 3.5 million). Methodologically speaking, calculating Iraq's oil production is fairly problematic. The problem is that after the 2014 revenue distribution agreement between Baghdad and Erbil became invalidated, Iraqi Kurdistan has been producing 500,000 barrels of oil per day, sidestepping the central government. Moreover, Kurds control the oil-bearing region of Kirkuk in the north of Iraq, which the Kurdish Peshmerga (military forces) liberated from ISIS.

The state wages its own military campaign against ISIS, and this requires significant resources. With oil prices at $30–40 per barrel, Iraq's foreign reserves have declined significantly, amounting to $40 billion as of February 2016.

If current prices hold, Iraq's foreign reserves may run out in as little as 18 months.

In order to overcome the consequences of the crisis, the Iraqi government requested help from international organizations such as the World Bank ($1.7 billion) and the International Monetary Fund ($833 million) in 2015. It should be noted that apart from rebuilding civil infrastructure destroyed during the war, about $350 million will be spent on developing oil communications. Thus, Iraq's dependence on oil will only increase, although an IMF-approved programme implies both moving away from oil dependency and economic diversification.

An overextended public sector remains a problem too, as it employs over 8 million people. It requires the kind of expenditures (about $8 billion) that exceed revenues from oil sales and essentially negates the oil production growth that has been taking place over the last decade. However, given the social risks involved in economic reforms, the government has been unable to take any measures so far. The same applies to high-cost subsidies: 2 per cent of the country's GDP goes to food subsidies, while 3.5 per cent goes to energy subsidies.

Given the situation, Haider al-Abadi's government is pinning its hopes on the further growth in oil production, for which it has every reason: 75 per cent of oil reserves remained undamaged as a result of the war with ISIS, nor did the the main oil fields currently exploited, oil refineries and transportation infrastructure, since they are all in the south of Iraq.

It is highly unlikely that future hostilities will affect the oil fields in the south and other parts of the oil infrastructure, as the Iraqi government has assigned 100,000 police officers to defend them.

However, it is already obvious that Baghdad will be unable to meet the goal it set in the early 2010s of increasing oil production to 9 million barrels per day by 2020.

Despite the difficult situation in which the government finds itself and the disastrous consequences of military hostilities, Iraq is one of the most promising oil producing states. It has five gigantic oil fields: Rumaila, West Qurna, Zubair, Majnoon and Nahr Umr, whose reserves exceed 5 billion barrels in total. Their proximity to the ports in the Persian Gulf makes transporting the oil significantly easier. Like most oil fields in Southern Iraq, the gigantic oil fields are located in sparsely populated areas and the geological conditions are favourable for exploitation. Oil needs to be the basis of the future economic growth of the country, and not one of the reasons for the collapse of Iraq's statehood.

After the sanctions imposed on Iran in response to its nuclear programme were lifted on January 16, 2016, the world hydrocarbons markets waited feverishly to see what Tehran would do next.

Under the sanctions, the Iranian government never concealed its intention to restore former ties and increase oil imports by 500,000 barrels per day. And that is exactly what happened during the first few days, yet that oil largely came from floating oil storages; the reserves from Kharg Island in the Persian Gulf were the first to be tapped. It should be noted that Iran used supertankers in addition to land storage facilities. Very large crude carriers stored a total of up to 28 billion barrels of oil and oil products.

From the point of view of Iran, Iraq and Saudi Arabia are principally responsible for the growth in oil production and, consequently, for the low oil prices. Therefore, they should unilaterally decrease their output.

Due to the minimal production costs at Iranian oil fields (down to $1 per barrel), the regime hopes to return to its pre-sanctions export numbers within six months.

It should be noted that in 2011, Iran produced 3.7 million barrels of oil per day; however, the Iranian government was later pressured by sanctions into decreasing output by 600,000 barrels per day, and exports by 1 million barrels per day. The Ministry of Petroleum was tasked with reaching 4 million barrels over a short period of time, regardless of world prices. However, this task is unlikely to be carried out in full, since internal limitations will allow Tehran to increase its production by only 500,000–600,000 barrels per day by the end of 2016.

The sanctions created obstacles to Tehran's oil expansion: oil recovery dropped because of halted field exploitation and Western cutting-edge technologies were no longer coming into the country, which led to the depletion of infrastructure (pipelines, drilling and exporting facilities). The state's investments into the oil sector were minimal in 2014–2015 ($6 billion per year) due to the need to support the social sector. Said Gavampur, the head of the strategic planning division at the Iranian Ministry of Petroleum, believes that the Iranian oil industry will need at least $100 billion to make it competitive again.

Iran remains one of the key players in OPEC.


Due to the lack of coordination on oil production quotas in exporter countries since December 2014, Tehran will certainly use the "right to return to the level of production [it] historically had."

It should be noted that in 2011–2015, Iranian oil still went to its traditional markets – Asia Pacific countries, including China (500,000 barrels per day on average), India (300,000 barrels per day) and Japan (about 170,000 barrels per day). Nonetheless, in recent years, Saudi Arabia and Iraq, whose combined output growth in 2011–2015 exceeded 2 million barrels, took over the niches that appeared on the Asia Pacific market after sanctions had been imposed on Iran. These countries are Tehran's real competitors, along with several Latin American states that supply heavy crude oil. As regards Russian oil companies, they supply light crude and sweet crude; therefore, there is no real competition between Moscow and Tehran over the Asian markets.

It is in Europe where we should expect competition between Moscow and Tehran, as well as increased activity on the part of Saudi Arabia.

In 2011, before the sanctions were imposed, Iran shipped about 600,000 barrels of oil to Europe, one third of which went to Italy, with about 150,000 barrels going to Spain. Greece and France had already reached an agreement with the National Iranian Oil Company on renewing oil supplies starting February 2016.

Iran will spare no expense to regain a foothold in the Mediterranean.

The fact that Tehran started offering unprecedented discounts of $6.55 per barrel of heavy Iranian oil immediately after the sanctions were lifted is proof of this.