Russia ranks third in the world in oil production, after Saudi Arabia and the United States. Estimates place proven and potential oil reserves at 8 to 11 billion tons. Russia's oil production peaked in 1987, then began a decline that continued through 1995. In the latter year, the yield was 741 million barrels, 13 million barrels less than the previous year. Output for the first quarter of 1996 was 182 million barrels.
Wasteful Soviet oil exploration and extraction techniques depleted wells, which often fell far below their potential capacity. Soviet technology was not capable of exploring and extracting as deeply and efficiently as Western technology. These handicaps have been instrumental in Russia's plummeting oil production during the last two decades. In 1994 the number of oil wells drilled was only one-quarter the number drilled in 1983. About two-thirds of Russia's oil comes from Siberia, mostly from huge fields in the northwest part of the region. The main European oil and gas fields are located in the Volga-Ural region, the North Caucasus, and the far north of the Republic of Komi (see fig. 9).
Russian oil companies are vertically integrated units that control the entire production process from exploration to transmission. The largest company is Lukoil, which, according to some measurements, is the largest oil company in the world. The dominance of a few large companies has made all stages of petroleum exploitation and sale extremely inefficient. National and local government policies have discouraged individual retailers from establishing independent gasoline storage facilities and stations; therefore, retail gasoline likely will continue to be in very short supply (only 8,900 stations were operating in Russia in 1995). Until January 1995, government policy applied quotas to oil exports, and until July 1996 tariffs were applied to oil exports. Both policies, resulting from the gap between controlled domestic prices and world market prices, aimed at ensuring a sufficient supply of oil to meet domestic demand; both were lifted as the gap narrowed.
The search for new oil deposits has been a primary force in Russia's foreign policy toward states to the south. Russia has staked its claim to the Caspian oil reserves that Western companies are exploring in conjunction with Azerbaijani, Turkmenistani, and Kazakstani state companies. The presence of Western interests and the strong role being played by Iran and Turkey, Russia's traditional regional rivals, have complicated this policy, which aims to achieve maximum benefit from Russia's position on the shore of the north Caspian. Also a source of international controversy is Russia's insistence that Caspian oil flow northward through Russian pipelines rather than westward via new lines built through Georgia and Turkey (see Foreign Investment in Oil and Gas, this ch.).