Michael S. Bernstam - Steven R. Rosefielde
Russia’s oil and gas empire is a dinosaur—big, rapacious, and dying off.
Earnings from Russia’s vast oil and gas network make up nearly half of its total export revenue and more than 30% of its budget revenue, including that needed to finance its war on Ukraine. But Western oil sanctions, the U.S. shale revolution, and an output-eager OPEC are eating away at the country’s oil and gas income. Russia’s own policy blunders aren’t helping.
Each day, U.S. shale drilling produces upward of 8 million barrels of oil and 80 billion cubic meters of natural gas—accounting for roughly 8% of global oil and more than 20% of global gas production annually. To compete for market share, the OPEC members shifted this year from tightening output to flooding the market with cheap oil. It aims to hit a 2.2 million bpd target in coming months, and ramped up production by 500,000 bpd last month alone. Oil prices dipped 2% this week after OPEC said it would likely boost production again in October.
Oil prices are in a long-term downward trend: The annual average price per barrel of benchmark Brent, which sat around $81 in 2024, is forecast to fall to $66 in 2025 and $58 in 2026. For Russia, each $10 decline per barrel represents the loss of tens of billions of dollars in potential revenue each year.
After the European Union embargoed Russian oil and the EU and the G-7 imposed the price cap on worldwide Russian oil exports, China, India, and other buyers applied their market power to extract a permanent discount off Brent of at least $11.5 per barrel. This is in addition to the forecasted decline in Brent prices of $15 per barrel in 2025 and another $8 per barrel in 2026. In all, Russian foregone revenue will add up to $69 billion in 2025 and $90 billion in 2026.
Russia’s oil and gas revenue has already fallen 20% this year when compared with a year prior. Russia’s largest oil company, the state-owned Rosneft, forecasts price declines from $45 per barrel at the end of 2025 to $43 in 2026.
This price trend cuts into the country’s gross domestic product, as prices move closer to production costs. Russian official statistics reported a 9% contraction in the first half of 2025 in the output of the natural resources category, which mainly consists of oil and gas. The International Energy Agency issued a warning in July that Russia’s oil production capacity may not be sustainable.
Saudi Arabia’s average production costs hover around $10 per barrel. Russia’s costs are $42 per barrel onshore and $44 offshore—$32 per barrel before taxes. And these are just averages. There is a large variance; many oil fields in Siberia have production costs above average. Reducing taxes could help keep production profitable, but then the Russian government would lose revenue they need to finance their war in Ukraine.
In the early days of that war, Russia committed a major policy blunder. They cut their natural gas supply in an effort to force the European Union to stop supporting Ukraine. In doing so, Russian authorities forfeited about 100 bcm of the European natural gas market. The explosion of the Nord Stream pipelines months later was inconsequential: The pipes were already inoperative.
The Russian gas blackmail ultimately failed. Pipeline gas from Norway and liquefied natural gas from the U.S. was substituted in for Russian gas. Russia likely permanently lost its market share, which fell from 45% of the EU gas imports in 2021, to 19% in 2024, to a projected 13% in 2025. In May, the EU ruled to completely phase out Russian pipeline and LNG gas supply by the end of 2027. Russia will lose forever its erstwhile 150 bcm market and forfeit $60 billion a year.
The U.S. has been trying to make this happen for decades. The Reagan administration started the work of persuading the Europeans to eschew the Russian oil and gas pipelines network and avoid energy dependency, to no avail.
Events since 2022 have delivered the U.S. that goal. The European embargo on Russian oil and Russia’s failed natural gas blackmail seems to finally be delivering European independence from Russian energy.
The most salient symbol of Russia’s diminishing oil dynasty is its 65-year-old oil pipelines network: 2,500 miles of rusting pipes from Siberia to Western Europe, idle since the European Union oil embargo, and carrying only 0.2 mbd to the landlocked Hungary and Slovakia. The broader network of Russia’s pipelines—more than 6,100 miles long—remains empty or damaged.
They epitomize the demise of the Soviet and Russian energy empire. It will never come back.
* About the authors: Michael S. Bernstam is a research fellow at the Hoover Institution at Stanford University. Steven R. Rosefielde is a professor of economics at the University of North Carolina at Chapel Hill.
