#6
The Globe and Mail (Canada)
November 17, 2001
Russia has much to gain from oil price war
By MICHAEL DEN TANDT
From Saturday's Globe and Mail
How odd that a global political crisis and a war in one of the world's most unstable regions would drive oil prices down. But that's precisely what has happened. Western consumers have much to gain. Energy companies, and their shareholders, have much to lose, at least in the short term.
After Sept. 11, it became immediately clear that Russia and the United States would move much closer toward partnership than they ever had before. Russia retains immense influence in the former Soviet republics neighbouring Afghanistan, and the Russians have their own radical Muslim terrorist problem in Chechnya.
But now, for the first time, the extent of the strategic shift in U.S.-Russian relations, and the potential economic benefits to both sides, are becoming clear. The Russians, with American support, are attempting to replace the Organization of Petroleum Exporting Countries as the world's major supplier of energy.
The battle lines were drawn Wednesday when OPEC's meeting in Vienna broke up with no agreement on a 1.5 million barrel-a-day production cut. The cut, much anticipated by the markets, was intended to push the price of crude up toward OPEC's preferred price range of $22 to $28 (U.S.) a barrel.
But along came Russia, the world's second-largest exporting nation, as the spoiler. The Russians politely declined to join in any production cut, causing OPEC to postpone its own plans until January, conditional on the Russians jumping aboard.
Russia has proved increasingly uncooperative with OPEC's efforts to shore up its monopoly. Chris Edmonds, energy analyst at Realmoney.com and managing director of Atlanta-based Resource Dynamics LLC, pointed out recently that Russia agreed in April, 1999, to help reduce global oil production by 7 per cent. Soon after, the Russians boosted production by 400,000 barrels a day.
"It's clear to me that OPEC has lost a significant amount of its pricing power," Mr. Edmonds said in an interview. "Otherwise why would [they] sit around and literally beg countries like Russia to participate? What kind of a cartel is that?"
There are several reasons for the Russians' stance. Even before the Sept. 11 attacks on New York and Washington, U.S. President George W. Bush was intent on reducing America's dependence on foreign sources of oil. But in the context of the war on terrorism, and the continuing strife between Israel and the Palestinians, "foreign" actually means "OPEC." That's why crude almost certainly figured large in Mr. Bush's talks with Russian President Vladimir Putin this week.
Any large increase in non-OPEC production not only helps keep energy prices down, thus bolstering hopes for a global economic recovery. It also shifts the geopolitical equation in favour of the United States. It makes it possible, in theory, for the Americans to contemplate wider action against Middle Eastern terrorists, with less fear of an Arab backlash. And in future, it might make the Americans less beholden to Israel, which has always served as a forward base protecting the West's access to Arab oil.
Russia, for its part, has plenty of political reasons for co-operating with the United States. These include eventual entry into the North Atlantic Treaty Organization, cover for its campaign against Chechnya, and a sympathetic ear on missile defence, among other things. And the potential economic benefits are enormous.
"Russia wants a bigger share of the world oil market," Mr. Edmonds said. "And they're willing to buy that share. They're willing to put prices low enough that people buy from Russia, not OPEC." At the end of the day, Russia wants better trade relations with the rest of the world, Mr. Edmonds said, "and that means oil."
The key here is that the Russians are the aggressors in this price war. Most analysts estimate that they can profitably extract oil as long as crude remains above $15 a barrel. OPEC officials are threatening to allow the price to drop to $10, but few industry observers believe they'll follow through. More likely, analysts say, is that crude will bottom at between $15 and $17 a barrel in the next few months, after which demand from a rebounding global economy will pull it higher.
So, where does that leave the Canadian oil patch? For the near term, in a pickle. Prices of these stocks, as reflected by the Toronto Stock Exchange oil and gas subindex, moved sharply higher after the Sept. 11 attacks, on anticipation that U.S. retaliation would lead to a Middle Eastern conflict. Now, given the outlook for a continuing slide in crude prices in the near term, the stocks have nowhere to go but down. Within weeks, bargains will emerge amid the rubble. But for now, it's best to heed the old market adage: Don't try to catch a falling knife.
Next Article