I know a little about the Russian oil companies because I own some Lukoil.
From what I understand, the cost of production in Russia is very low ($3-4 per barrel). The increases in production that we are seeing now are due to increasing cap-ex due to the recent improvement in the profits at Russian oil companies. Russia's economy improved greatly with the devaluation and oil price surge of 1998. Now, Russian companies are making up ground in cap ex investment that was neglected during the 1990's. Oil production in the FSU dropped in half during the 1990's.
I am not sure of the purpose for the grandstanding of the Russians over oil production. The Russians may indeed be leaning toward the west some and don't want to play OPEC's game.
The talk of a price war seems to be just talk. There is a certain amount of spin associated with Russia's increases in production. For example, Russia increased production in 2001 by 500,000 bpd. But, 200,000 bpd of that increase went to satisfy increased domestic demand. If you add the extra 300,000 barrels of exports to the many declines in other non-OPEC areas, Russian production increases are not strong enough to cause an oil price collapse by themselves.
As Simmons points out, the FSU and Brazil are responsible for 60% of non-OPEC output increases over the last few years. Increases in production in the FSU and Brazil will probably continue. But, we also have the peaking of the North Sea and declines in other non-OPEC areas to factor in.
I think the bottom line is that non-OPEC production is very close to a peak. We could see that peak this year. Also, we have a good increase in demand coming from recovering economies. Look at the U.S. airlines. They were still at 85% of capacity in December 2001. As of mid-year, the airlines hope to be back at 100%. This is over 1 mbpd in added demand. The typical seasonal decline in demand will be overshadowed this year by a cyclical recovery.
OPEC may see that non-OPEC production increases are soon to no longer be a threat. If they do, then they may be more interested in just getting world-wide inventories back down to levels that gets oil prices back in the OPEC price-band. So far, it looks that OPEC is indeed executing its production cuts.
I don't see a oil price war. In fact, I see $30 oil as early as mid-year. |
