#7
The Economist (UK)
Nov 21st 2001
From The Economist Global Agenda
OPEC v Russia
The oil price has plunged after OPEC launched a full-scale price war to force Russia to join it in making substantial production cuts. So far, Russia is not playing ball, though the pressure on it is mounting
OPEC’s glory days appear to be well and truly over. For a while in the late 1990s, it appeared as if the oil cartel could regain its old power to keep up the price of oil. But its resolve has collapsed in the face of a dramatic fall in demand triggered by a global downturn. The oil price, which had been weak for months, plunged on November 15th, when the cartel in effect launched a price war against Russia, the world’s second-biggest oil exporter. After a brief rally, prices fell again on November 19th when the Russians refused to offer any more production cuts at a meeting with Mexico, a fellow non-OPEC oil producer. Brent crude, the North Sea benchmark, fell to $16.65 per barrel in mid-session trading that day, a 29-month low, before rebounding somewhat on news of lower-than-expected American oil stocks and the growing pressure on Russia. Mexico's oil minister said this week that he expected the non-OPEC members to agree to join the OPEC cuts shortly.
On November 14th, at a meeting in Vienna, OPEC had pledged to cut production by 1.5m barrels per day (bpd) from January 1st, but only if non-OPEC members cut their production by 500,000bpd—a tall order. Meeting a lukewarm response from Russia, Kuwait’s oil minister, Adel Khalid al-Sabeeh, angrily predicted that oil prices could plummet to $10 per barrel. Unsurprisingly, traders duly marked prices lower. The price of the American benchmark, West Texas Intermediate, which trades slightly higher than Gulf crudes, fell by $2.34 to $17.50 per barrel for December delivery. This is well below OPEC’s target of $22-28 per barrel for a basket of Gulf crudes.
While the cartel is keen for all non-OPEC members to share the pain, its chief ire is aimed at Russia. Other non-OPEC members have pledged to cut production if Russia does. Mexico has promised to cut by 100,000bpd and Oman by 50,000bpd. Norway had been wary of promising a cut—its oil minister said that prices of $20 a barrel were not low enough to prompt one—but it has said it will act to prevent a price collapse. It has also made any cut conditional on Russian action. The three are looking for a Russian cut of 300,000bpd, ten times what it has so far promised.
So Russia is the bad boy in OPEC’s eyes. Its promised cut of 30,000bpd is less than 0.5% of its daily production. Moreover, its record of keeping its word is not good. During the last sharp drop in oil prices, in 1998-99, Russia promised to cut production by 7%: instead, output rose during 1999, with exports up by 400,000bpd, according to Salomon Smith Barney, an investment bank. But cutting oil output would not be easy for Russia. For one thing, whatever its government may want—and Alexei Kudrin, the finance minister, has said he would like to do a deal—Russian oil companies are privately held. Only one of the big six oil companies, Lukoil, which does business with Iran, an OPEC member, favours price cuts. Mr Kudrin said that Russia's balance of payments was strong, and that he was not worried about low oil prices. However, this looks like gamesmanship: Russia needs all the hard currency it can get to service its foreign debts.
Russia has another reason for not playing OPEC's game. Its president, Vladimir Putin, has seized the opportunity presented by the September 11th terrorist attacks on the United States to charm his way into the western fold. Colluding to increase oil prices when the global economy is teetering on the brink of recession is hardly the act of an ally.
Next Article