Russia, Norway Stir Oil Price-War Cauldron
By Mike Norman
Special to TheStreet.com
10/10/2003 12:09 PM EDT
URL: thestreet.com
Economic Analysis
Russia has talked of increasing oil output.
The ball is in OPEC's court.
The U.S. is obviously not isolated in the world.
A bombshell was released on global oil markets yesterday, but it went completely unnoticed. Two oil powerhouses, Russia and Norway, scoffed at OPEC once again, indicating they weren't willing to cooperate with global cuts in production. The mounting confrontation almost certainly portends a price war.
Norwegian Petroleum and Energy Minister Einar Steensnaes said Norway sees "no reason to cut its oil output now, as prices are already very high and weighing on the world economy." Steensnaes went on to say his country could tolerate much lower prices for benchmark Brent crude, and even went as far as to say that Norway could live with a price of $15 to $16 -- it's currently at $32 -- as long as it remains stable.
As if that weren't enough, Russian President Vladimir Putin, delivering the second half of a one-two punch, said Russia may increase output -- not just refuse to go along with production cuts but actually raise output.
Putin then added this piece of analytical brilliance: He said a Russian output increase would not destabilize the oil market. Well, that last statement ranks up there on the list of the all-time most extraordinary things ever said.
These comments from Russia and Norway, plus Mexico's similar statements a few weeks ago, squarely put the ball into OPEC's court. It can be construed as nothing more than an outright dare to let prices collapse. You may recall that the cartel said it wouldn't support prices by itself if non-OPEC producers didn't play along. Those producers are not only refusing to play along; they are pretty much saying, "We want prices lower."
This also highlights the fallacy that the U.S. has become isolated in the world. That Russia, Mexico and Norway would directly challenge the OPEC cartel, fully aware of the consequences, should be a clear indication that the U.S. still has plenty of friends who are influential.
With just a little imagination, you can picture a conversation that could have occurred between Bush and Russian President Vladimir Putin at the president's Texas ranch last month:
PUTIN: Mr. President, thank you for inviting me to your lovely ranch. You'll have to visit my dacha in Sochi someday.
BUSH: Thanks, Vlad. I asked you here because I need your help.
PUTIN: My help, Mr. President? Why would the world's last remaining superpower need the help of a vanquished adversary?
BUSH: Well, it's those darn Saudis -- they are jacking up the price of oil again. If I didn't know any better, I'd think they were trying to mess up my chances for re-election. And while I'm sure that's not their intention, I just can't take the chance.
PUTIN: I see, Mr. President. So what you're asking is for help from Russia in getting oil prices down.
BUSH: I knew you were a smart man, Vlad.
PUTIN: Mr. President, Russia's economy depends very heavily on oil revenue, and we like high prices because it brings in lots of money. If we caused prices to come down, it would hurt out economy, and that would be bad, politically, for me. I'm sure you understand.
BUSH: Sure I do, Vlad. I'm a pragmatic guy. After all, I settled for a $350 billion stimulus package when I really wanted a $726 billion package. So believe me, I hear ya. However, aren't you trying to gain entry into the World Trade Organization?
PUTIN: Yes that's right, Mr. President.
BUSH: And wouldn't entry into the WTO be a crowning achievement for you, both politically and economically?
PUTIN: That's right, Mr. President. However, the WTO is resisting us because we have subsidized domestic energy prices. They say our fuel prices are too low relative to world market prices. However, if I cut those subsidies, our internal energy costs would skyrocket, and that would be political suicide for me. I just can't do it.
BUSH: I understand. You know, Vlad, the U.S. has some influence in the WTO -- I'm sure you're aware of that.
PUTIN: Yes, of course I know. We'll need the U.S. to be on our side to get admitted.
BUSH: And I want the U.S. to be on your side, Vlad, but you'll have to do something for America. I have an angle: What if you raised production and world oil prices fell, bringing them more in line with your domestic energy prices? You could then cut subsidies and there would be little political fallout, right?
You'd gain entry into the WTO, giving the Russian economy a huge boost to offset what is lost by lower oil revenue, right? And we'd get our lower energy costs. So Russia would be happy and America would be happy, get it?
PUTIN: Yes, Mr. President. That's brilliant!
BUSH: Please don't let it get out, Vlad. I like it when everyone thinks I'm dumb. I get more things done that way. |
