Russia consumes about half of its daily oil production, which recently surpassed the 9 million barrels-per-day (bpd) mark, and exports the other half. The United States consumes 20 million bpd, or almost one-third of total world consumption. Global crude-oil production in 2003 averaged 72 million bpd, of which 8.7 million bpd came from Saudi Arabia, 28 million bpd from the Organization of Oil Exporting Countries (OPEC) and 8.6 million bpd from Russia. The United States has long been the 800-pound gorilla of consumers, but newly developing nations such as India, Brazil and China are set to challenge the gorilla.

According to some academics and energy insiders who have long been labeled "conspiracy theorists," world oil production has reached its peak. They call this situation Peak Oil. Peak Oil is a simple concept. A maximum midpoint (peak) of oil production will occur soon. From the peak onwards, a new age begins. Industrial civilization, with its dependence on oil in its present form, is doomed from that point on, according to the theorists. Oil has always been the primary component of our industrial civilization. The golden age of growth was on the left side of peak production curve. There is no alternative energy that has compact, versatile and cheap power of today’s conventional oil. Oil is the primary component of all we eat, have and do. The Peak Oil theorists believe that at $40 per barrel, it is still the most undervalued commodity in the world.

Analysts with world’s oil majors and a vast majority of energy analysts and think-tanks dismiss this idea. The following text comes from an e-mail sent to me from the person responsible for global energy monitoring and publications for a leading energy giant. "We do not at this time see any connection between the functioning of oil markets and weakness/strength, respectively, and oil 'peaking' (March 2003)."

But the theorists argue that peak oil is right there in the industry’s own data. Despite all of the technological advances and exploration efforts, we have had 40 years of continuous decline in discovery since the discovery peak in 1962. The discovery curve indicates that we have about 10 percent of oil left to find. Today, we are consuming four barrels of oil for every new one barrel that we find, and the gap will only worsen. The longer we pump and consume today’s undervalued price level, the steeper will be our "supply cliff" when we reach the peak.

Oil exports cost Russia too much

The United States is the mother of all oil consumers. Russia is fast becoming the largest supplier of oil to world markets. It has another great charm — it is the most stable country that can be depended upon to continue the supplies. Saudi Arabia, the erstwhile closest ally of the U.S., has become a dangerous territory, as has the whole region of the Middle East. Whatever oil reserves are there in that region could be disrupted or put out of reach of Western countries at any time because of political and/or terrorism-related issues.

According to the U.S.-based Energy Information Administration, "Russia earned an estimated $58.2 billion in net oil-export revenues in 2003, with the country's revenues expected to increase another 15 percent in 2003 to $66.8 billion." In order to maximize income to state coffers, Russia has recently taken the lead from Saudi Arabia in terms of oil production.

All countries follow their own discovery peak, followed by a production peak. According to the Association for the Study of Peak Oil and Gas, reserve limitations will force Russian production dramatically downwards between 2010 and 2020, while Saudi Arabia’s production will taper downwards more gradually. The question is at 9 million bpd and growing, is Russia selling too cheaply and too quickly prior to a giant oil-bull market?

About 17 percent of U.S. oil consumption goes to fuel its agriculture. Much of U.S. agricultural production is shipped back to Russia. According to the USDA’s Foreign Agricultural Service, Russia imported over 1 million metric tons of wheat in 2003. Modern agriculture gets five times more productivity than traditional forms of organic farming, but without fossil fuels to make fertilizer, pesticides, herbicides, tractors, storage facilities, production facilities and transportation, there would be very little productivity.

Estimates range between 4 and 10 calories from fossil fuel to every 1 calorie of sunlight that makes it into our grain. It is common knowledge among specialists that "modern agriculture is the use of land to convert petroleum into food (Bartlett, 1978)." Wheat was produced primarily by fossil fuels, as were the majority of other Russian food imports. Interfax reported recently that "Russian imports of agricultural products increased to $11.2 billion in 2003, up from $10.3 in 2002". Russia might be better off slowing down the export of oil and increasing foreign direct investment into the Russian agricultural sector.

Peak Oil theory gaining grounds

Ever since oil hit $40 a barrel earlier this year, the volume of stories on peak oil have exploded onto the front pages of about every major media outlet. Last year, peak oil was a "Top Ten Conspiracy Theory," according to Alternet.org, a publication dedicated to serving journalists and policy-making insiders. But now, in 2004, peak oil has become "The Next Big Thing," according to the Oil and Gas Journal, a publication dedicated to serving energy insiders. As the following links easily show, peak oil is finally being taken seriously.

"A volatile epoch of recurring price shocks and consequential recessions dampening demand and price is now regarded as more likely, with terminal decline setting in and becoming self-evident by about 2010," said oil geologist Colin Campbell.

Ever since Royal Dutch Shell downgraded its oil-reserve forecasts, the whole energy market is more receptive to alternative theories. What is most likely is that oil prices will continue to climb because there is very little chance of substantially increasing above ground supply. Analysts are already saying that price of $180 per barrel within a decade is likely. That would bring additional billions of dollars to Russian economy by 2010, assuming that rising production costs offset additional production volumes.

But there is a lesson to be learned for Russia. The Russian government should invest in scientific research to find alternative sources of energy before this game comes to an end. Oil is a double-edged sword, bringing wealth and complex geopolitical risks to the players. Those who continue to live by the sword, will surely die by the sword.