#12
Newsday
November 25, 2001
A Slick Indicator to Economic Recovery
Russia's pending oil production decision might lead to an upturn in United
States
By Susan Harrigan
STAFF WRITER
People trying to figure out when the U.S. economy will turn up should pay close attention to oil prices, and particularly to Russia, in coming weeks.
Relatively low oil prices could improve America's chances of recovering next year from what appears to be a recession. But oil's price level depends to a great extent on the outcome of an elaborate game of "chicken" currently being played by Russia and the Organization of the Petroleum Exporting Countries.
"It's great political theater on both sides," Phil Flynn, an oil analyst and trader at Alaron Trading Corp. in Chicago, said of the dance between Russia - a huge oil producer that is not an OPEC member - and the cartel, which wants to cut oil production in order to drive up prices.
"I think Russia eventually will get concessions from OPEC on some side issues, and go along , but no one knows," he said.
Oil prices have fallen more than $10 a barrel since September's terrorist attacks. The attacks sharply cut air travel, reducing the need for jet fuel, and lowered overall demand for energy by exacerbating a global economic downturn.
Ironically, considering the terrorists' purposes, lower oil prices are expected to stimulate economies in the United States and elsewhere by making gasoline, home heating oil and other items less expensive. The result is somewhat like a tax cut, putting more dollars in consumers' pockets, said Nicholas Perna, chief economist of Perna Associates, an economic analysis and forecasting firm in Richfield, Conn.
Earlier this month, OPEC announced that to lift oil prices, it would cut its output beginning January 1st by 1.5 million barrels a day - but only if non-OPEC producers also cut production by a total of 500,000 barrels a day, giving up a chance to grab market share. So far, Mexico, Norway and Oman have agreed to make substantial cuts.
Russia, however, said at first that it would would only cut daily production by 30,000 barrels, and then raised that figure to 50,000 barrels late last week. That amounts to a token 0.7 percent cut for the world's second-largest oil producer after Saudi Arabia. OPEC had hoped that Russia would cut production by 150,000 to 200,000 barrels per day.
Russia said the government will have another meeting to discuss cuts with Russian oil companies early next month. Lisa Rothenberg, a Russian energy analyst at Energy Security Analysis Inc. in Wakefield, Mass., said that by then, Russia may be ready to go along with the proposed cuts because its oil exports usually slow down in the winter anyway.
Flynn believes that Russian President Vladimir Putin is using Russia's crucial role in OPEC's plan to raise prices as leverage to win favors from the United States, as well as OPEC. "They were together on a Texas ranch and didn't talk about it ?" he said, referring to Putin's recent meeting with President George W. Bush. "I think they did ... I wouldn't be surprised if Bush said, 'come on Russia, see what you can do.'"
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