Russia And The Opec Future

The Saudi Arabian crown prince Abdullah Bin Abdul Aziz arrived in Moscow on Monday for a three day visit, in order to promote a closer cooperation between Russia and Saudi Arabia. The two countries are the two biggest oil exporters worldwide. It is the first visit of a Saudi representative in Moscow since 1932. This shows only how difficult the situation has become for Opec to maintain the oil price within the self declared target band of $22 to $28 per barrel without the cooperation of huge non-Opec producers like Russia. The Russian federation is also heavily dependent of high oil prices but Russian oil companies have recently announced that their operations would still be profitable with an oil price in a range of $16 to $22. The cooperation treaty which was announced on Tuesday lacked important details and the Russian commitment to a stable oil price seems to have more political than economic significance.

However, the stakes are not only high for Saudi Arabia and the Opec. In the last four years, Russia has heavily profited from the Opec measures and earned $70 billion more from its oil and gas exports than it did in the previous four-year period. If the today?s price controls will stay in place until 2010, Russia?s combined corporate cash flows and budget revenues will probably be close to $100 billion annually. It could however well be, that the ?free ride? will soon end and then the country would have to choose if it will support Opec or accept lower oil prices. However as most of the oil companies are privately owned in Russia, it would not be easy to cut production.

Although the oil prices stay at the moment, well over $28 per barrel, the situation of the Opec could very soon become uncomfortable. The current threat is unlikely to come from Iraq, where the US struggle to increase oil production is severely hampered by sabotage and looting. Opec price stability is more endangered by the output growth of its own members and of non-Opec countries like Russia. It is expected that Opec supplies will increase in the fourth quarter of this year and in 2004. This could make it increasingly difficult to fine tune the oil prices. What non-Opec countries are concerned, it is expected that production will surge by almost 2 million barrels per day in the fourth quarter and there is no indication that this expansion will stop in the following year. These facts make it clear that Opec has not much time anymore to solve the pending quota issue. Algeria, Nigeria and Libya request higher quotas which better reflect their expanding capacities. Nigeria even asked that population and debt levels should be taken into consideration when the new quotas will be determined. This proposal is likely to meet resistance from the Gulf States which want to stick to quotas set according to production capacity and reserves. To make things worse, there should be some room to accommodate the rising Iraqi production, which has not been included in the quota system since 1990. It is likely that if the Opec does not agree to higher quotas for Nigeria and Algeria, these two countries will continue the today?s practice of violating the quota system. That will leave no room for Saudi Arabia, by far the biggest Opec producer, but to make further compromises to the smaller members of the cartel.

The first attempt to discuss the issue will be made on the coming OPEC meeting on 24 September in Vienna. An Opec commission suggested that future quotas should be determined on the basis of reserves, production capacity, historic production, domestic consumption, per capita oil income and current quota levels. However, it is uncertain whether the proposed solution will be accepted by the whole cartel.

The future of the Opec is hard to predict. If the organization is to cut future production to aggressively, it will only prompt the US to accelerate their efforts in Iraq to increase crude output there and keep Iraq out of the Opec which would be a major blown to the cartel, once Iraq?s oil production is back to normal levels. If two of the three biggest producers (Russia and Iraq) are not member of the Opec, the organization runs the risk to lose its ability to control and steer the oil market. Furthermore, if the US is not convinced anymore that Opec is capable of guaranteeing a reasonable stable oil price, Iraq is the perfect weapon to destroy the cartel. Iraq?s reserves are underestimated today, due to a lack of modern exploration equipment in the country. It should well be able to produce around 6 million barrel per day if only there are enough investments into its oil infrastructure.

However, the future for the cartel might be much brighter than it seems now to be. Production in the North Sea and in the US is decreasing and oil demand in Europe and the US is rising. It is expected that by 2010, consumer countries require from net exporters 70 million barrels of crude per day. Russia might be able to export 7 million barrels per day by that time but that leaves still a demand of around 50 million barrels per day which should be satisfied by Opec countries. Such a situation will give the cartel a much stronger position than today, but only if it survives the coming years.


Author: Nana Bendukize