Russia determined to play strong hand in oil
By MATHEW INGRAM
16:06 EST Thursday, November 22, 2001
What the heck is Russia up to? That's the question of the moment in the global oil industry. Oil traders and politicians alike are busy poring over every press release from OPEC and every news story on Russia's Tass wire, trying to decide how this international poker game will end. Will Russia eventually cave in and cut production as much as OPEC wants it to — or is it prepared to make only a token effort as oil prices fall into the tank, in order to make a power grab and cozy up to its new American friends? Place your bets.
When the OPEC cartel first pushed the issue at its meeting in Vienna on Nov. 14 — saying it would not cut its output unless Russia and the other non-OPEC countries did their part — Russia said it would reduce production by 30,000 barrels a day, or .5 per cent of what the country produces every day. In other words, a thumb in OPEC's eye. On Friday, it agreed to cut by 50,000 barrels, which is still a virtual drop in the global oil bucket.
The past week or two has demonstrated just how crucial a role Russia has taken on in the new international oil market, with various members of OPEC — not to mention fellow non-OPEC producers Norway and Mexico — reduced to virtually begging the former Soviet nation to cut its production in order to boost the price of crude. Why? Because over the past few years Russia has increased its output to the point where it is now the world's largest non-OPEC oil producer (having taken that title from Norway) and the second-biggest producer of crude in the world, next to Saudi Arabia.
In one sense, the jockeying with OPEC over production is a simple power grab. Having got to the point where it is a major non-OPEC force, Russia wants to keep its output high or perhaps even increase it further, because that way it can steal market share away from OPEC — another reason why the members of the oil cartel want the country to agree to output curbs. The latest estimates are that OPEC has already lost 5 points or more of global market share, falling below the 35 per cent level from 40.
That's why even if Russia agrees to enlarge its output cuts from 50,000 barrels, it is highly likely that there will be some "leakage" over time, as oil traders like to call it. In other words, Russia may decide to produce just a little bit more than it agreed to, and that way it could get the best of both worlds for a certain period of time — boosting the price by agreeing to cut production, then keeping it high to get the maximum benefit.
Going toe-to-toe with Saudi Arabia is a dangerous game — as many other OPEC challengers have discovered over the years — since the Middle Eastern nation's cost of producing a barrel of oil is the lowest in the world, at about $2 (U.S.) per barrel. In other words, the Saudis can produce oil virtually by digging in the desert with their bare hands, and that means they can make money even if oil falls to $10 a barrel, as Saudi oil minister Ali Naimi warned it might last week. The country also has the billions it accumulated over the past few years when oil prices were high.
However, Russia's costs are also pretty low, at about $10 a barrel — and the country may be betting that whatever their costs of production, the Saudis would be the first to blink because their entire economy relies on income from oil revenues. The last time oil sank close to the $10 level, in 1998, the Saudi economy was in pretty desperate shape, and the country perceived as a nation of millionaire sheikhs actually started to run budget deficits. That in turn increased the political friction in the country, where the royal family has come under fire from militant Muslims.
But the poker game Russia is playing is even more complex — and the benefits of keeping production high may be seen as worth it in the longer term, even if falling prices hurt its economy as well (30 per cent of the country's GDP comes from on oil revenues). For one thing, it is clearly trying to get more friendly with the United States, to try and improve its financial picture and as a way of gaining more influence on European affairs. Just after the OPEC meeting, in fact, President Vladimir Putin met with U.S. President George W. Bush to discuss financial aid and a greater role for Russia in NATO.
And whatever the official line happens to be, the United States is also likely to look kindly on Russia if its actions help to keep the price of crude low, since that acts as a booster shot for the global economy. In the end, the benefits of keeping its output high may outweigh the disadvantages for Russia — and that could turn out to be OPEC's nightmare.
E-mail Mathew Ingram at mingram@globeandmail.com |
