RIA Novosti
April 24, 2008
Oil prices soar to $120, and this is not the limit
MOSCOW. (RIA Novosti economic commentator Oleg Mityayev) - On April 22, oil traded in New York at an all-time high of $119.9 per barrel, and prices will most likely continue to grow, threatening the United States and Western Europe with stagnation and promising more petrodollars for oil producing countries, including Russia.
The price was definitely urged up by speculators, who have opted for investing in oil contracts now that the dollar is falling. Denominated in U.S. dollars, these contracts are becoming more expensive by the day.
The bulls use every available pretext to raise oil prices. This time they capitalized on the decline in oil production in Nigeria, news of the oilfield depletion at Mexico's state company Petroleos Mexicanos, and the Somali pirate attack on a Japanese oil tanker off Yemen.
However, oil prices are also growing for objective reasons, above all increasing consumption in industrialized countries and the rapidly developing economies of China and India, which has been spurring oil prices since 2002.
Oil production is also growing, but nearly all oilfields are being developed in the world, with the exception of Saudi Arabia, which can increase its oil output considerably. The operating fields have reached a plateau, which is why oil production in Mexico and Norway is falling. Russia, where oil production has been growing for the past nine years, registered a 1.3% decline in the first quarter of 2008.
The world has enough proven oil reserves, which have almost doubled since 1980. But spending on developing new and difficult fields, for example on Russia's Arctic shore and in east Siberia, will be much higher than oil production costs in the 20th century, especially given the current price situation on the oil market.
The logical conclusion is that the current price, $120 per barrel, is not the limit.
The leading oil consuming countries tried to convince OPEC delegates at the International Energy Forum in Rome, held on April 20-22, to increase oil production in order to reduce oil prices, but to no avail.
The cartel, which controls 40% of global oil production, replied that the current sky-high oil prices were the doing of speculators and have increased spending on production and the development of new wells, i.e., expense inflation.
However, the continued growth of oil prices may eventually allow oil producing countries to invest their super-profits in exploration and production. In other words, the current super-high oil prices are a requisite condition for an increase in oil production.
Oil producing countries should review their economic policy to ease the tax burden on their oil companies to encourage investment in exploration and production.
Last March, Russian Finance Minister Alexei Kudrin proposed cutting the tax burden on the oil sector by 100 billion rubles ($4.3 billion) beginning in 2009, in order to encourage oil exploration in East Siberia. However, Russian oil companies want much larger benefits.
The sky-high oil prices will soon hit the economies of the United States and Europe. The latest World Economic Outlook published by the International Monetary Fund in April forecasts a 0.7% decline in U.S. GDP in 2008 and a deceleration of the euro zone economy in early 2008, which could be running at a year-on-year rate of just 0.9% by the fourth quarter.
The IMF is not worried about the Russian economy, whose growth forecast for the year is 6.8%. Moreover, it plans to upgrade its forecast for Russia in May, although it has warned that the country may drown in the increasing flow of petrodollars. A high inflation rate has become a chronic ailment of the Russian economy, with increasing dependence on imports that is growing faster than exports despite the high oil prices.
The IMF has also warned about a possible overheating of the Russian economy, which means that some sectors, encouraged by the state's growing revenues, may produce more products than can be consumed.