RIA Novosti
May 21, 2008
Oil prices up to $130 and keep growing
MOSCOW. (RIA Novosti economic commentator Oleg Mityayev) - Oil has soared to a mindboggling $130 per barrel, and analysts say its unimpeded growth will continue.
This is good news for Russia, one of the largest oil exporters. However, fuel prices are also growing here, and there are no effective mechanisms to restrain them.
The main reason is the growing demand spurred by rapidly developing Asian countries, despite the current economic decline in the United States.
Encouraged by high demand and the falling dollar, speculators have increased investment in oil, gold and other commodities, creating a bubble. Investments in these assets have grown to $235 billion from $70 billion two years ago.
On May 16, Goldman Sachs, whose oil price forecasts are almost always correct, upgraded its oil target price for the second half of 2008 from $107 to $141 per barrel. Early this month, its analyst Arjun N. Murti predicted that oil prices could reach $150 to $200 per barrel over the next six to 24 months.
The bubble, which is nearly bursting, must deflate. Meanwhile, oil-exporting countries are raking in billions of petrodollars. With prices of Urals crude exceeding $100 per barrel this year, Russia is earning as much as $1 billion a day from hydrocarbons exports.
Growing global oil prices are pushing up the cost of fuel in Russia. Consumers don't care that Urals has grown by 65% over the past 12 months while fuel prices, "only" by 20%. The growth of world oil prices is affecting Russia's domestic fuel prices, but the connection is not direct or proportionate.
What Russian car owners cannot understand is why gasoline costs as much in Russia, a major oil producer, as in the United States, the world's largest oil importer. During the latest price hike in May, regular gasoline in the United States was sold at $3.80 per gallon, which is $1, or 23.75 rubles, per liter. In Russia, A92 regular cost 22.50 rubles and A95 premium, 23.54 rubles.
Oil is sold in Russia minus huge export duties, or 40% cheaper. Why then is gasoline so expensive? Oil companies and analysts cannot give a reasonable answer, and so the logical explanation is monopoly domination on the domestic oil and gasoline markets.
The most common argument is that there are not enough refining facilities and oil producers must make up for the losses they sustain from selling fuel oil on the domestic market cheaply and from paying high oil export duties. Gasoline prices in Russia are expected to rise by 20%-30% in 2008, most likely this summer when more people drive, or by early fall. Gasoline demand usually plummets by November, when Russian oil companies freeze prices until the next spring.
Russian authorities wonder why prices of Urals crude are set at a discount to Brent, oil produced in the North Sea. For more than two years now, they have been trying to set up an oil exchange for international traders and Russian oil sellers, in order to independently calculate the price of Urals crude. The government believes it will be even more profitable to sell Russian oil to western and eastern clients at this exchange than to export it.
But plans for an oil exchange have somehow transformed into trading in petrochemicals. This started at the St. Petersburg exchange in early March, but the number of transactions and their size are small.
The St. Petersburg International Commodity Exchange was set up on April 28 and is to start daily operation by the end of the year. The biggest sensation at the opening ceremony was the statement by Vladimir Milovidov, head of the Federal Financial Markets Service. He said the exchange would soon sell petrochemicals on the domestic market, and that foreign players were not vital for its operation.
The new exchange is unlikely to sell large amounts of Russian-made petrochemicals, let alone oil. Russia may fail to introduce transparent pricing of oil and petrochemicals because the market has long been divided between several large vertically integrated companies, which control oil production and refining and filling stations. They have long-term contracts and a network for selling their output retail and wholesale, and therefore do not need the exchange.
Ironically, liberal economists say that the situation can be changed only by a government order to buy petrochemicals for state agencies (35% of the domestic market) at the exchange, and to allow the state reserve fund not only to buy commodities but also to sell them at the exchange, and therefore to influence prices.
But there is a silver lining in this cloud. The lack of an oil exchange in Russia is keeping domestic oil prices well below global ones. And speculators so far cannot play with oil contracts aiming to create a bubble like the one growing on the global commodities markets.