Walker's World: Oil, Russia and OPEC

Sunday, 26 August 2001 7:00 (ET)

Walker's World: Oil, Russia and OPEC By MARTIN WALKER, UPI Chief Political Correspondent

PERIGORD, France, Aug. 26 (UPI) -- This week's decision by the Russian government to sabotage OPEC by increasing its oil production launches us all onto a fascinating economic experiment that might just help the world economy turn the corner from stagnation back to growth.

The White House economic adviser Lawrence Lindsey is not the only expert who reckons that the American slowdown was caused as much by last year's jump in the oil price as by the collapse of the dor.com bubble. Analysts at the Buba, Germany's central bank, reckon that energy costs explain a lot of the difficulties in Europe's biggest economy, which is highly dependent on imported oil and gas. The inflationary threat implicit in higher oil prices has been repeatedly cited by the European Central Bank to justify its reluctance to cut interest rates, despite anguished appeals from German industry.

A year ago, oil was trading at $37 a barrel. Two months ago, it was still trading at $30 a barrel. Last week, it was down to $26. During the boom years of the 1990s, it was usually below $20 a barrel.

The OPEC countries have been trying to nudge the price up, cutting production quotas three times so far this year, and reducing their daily output by about 13 percent.

Now Russia has come to the rescue, increasing their daily output by about 500,000 barrels a day, with more to come. Analysts at Germany's Deutsche Bank now reckon that oil exports from Russia and Kazakhstan will increase by as much as 45 percent by 2005, helping to keep world prices down.

Lower energy prices cut industrial costs and should help corporate profits, just as this week's announcement of 'stabilization' from Cisco, that giant of the high-tech sector, suggests that the American slowdown has bottomed out.

Thanks, Russia. But before getting carried away with optimism, it is worth looking at the dynamics of the Russian government decision. And make no mistake, despite the freeing of much of the Russian economy from state control, the energy sector remains under the Kremlin thumb. It was not independent Russian oil executives who decided to open the spigots and let the oil flow. It was the government.

The key announcement came last week from Igor Yusufov, the new Minister for Fuel and Energy, who told a Moscow press conference that Russia would "take its own export decisions in the national interest, without regard to OPEC "

Since energy accounts for more than half of Russia's export earnings, the oil and gas industry is of high strategic interest to the Kremlin. For the past five years, Russia has been pumping around 6 million barrels a day, a figure which should increase to 7 million barrels by the end of this year. All of the increase is going to exports.

And despite the conventional wisdom that Kremlin and political interference is the Russian energy industry's biggest problem, a number of smart decisions have been taken over the past five years. Two of the most useful were the decisions to break the bottleneck on Russia's oil export capacity by authorizing new pipelines.

Just five weeks from now, the most important new pipeline will start sending oil from Kazakhstan's Tinghiz oilfield to the Russian Black Sea port of Novorossisk. Both Exxon Mobil and Chevron are involved in the Caspian Pipeline Consortium which financed and operates the pipeline. And by the end of this year, another pipeline from the oilfields of northern Siberia to the Baltic port of Primorsk will help reach the 2005 target of increasing Russian oil exports by 30 percent.

This means serious money for the Russian economy, and for the Russian government's revenues. At $25 a barrel, an extra million barrels a day is an extra $9 billion a year.

Russia has thus avoided the temptation of cooperating with OPEC to screw higher prices out of the West's industries and consumers, and shown its perception of its real strategic interest -- which is with the West.

Where does this leave OPEC, some of whose more fiery members seemed to think that they could recreate the glory days of the 1970s, when the oil weapon was first deployed in the wake of the 1973 Yom Kippur war, and get rich while also pressuring the West to back away from Israel? And where does this leave Iraq, where Saddam Hussein was hoping to use his oil to break free finally from the sanctions that have kept him on short rations since the Gulf War?

It leaves the OPEC nations thinking again about the risks of trying to operate a cartel while lacking a monopoly of the oil supply. And if a lower oil price helps fuel a return to growth in Europe and North America next year, while locking a more prosperous Russia even more firmly into the Western economic system, Russia's President Vladimir Putin should be a very welcome guest at next summer's G8 summit in Canada.

http://www.vny.com/cf/News/upidetail.cfm?QID=214968

-- Martin Thompson (mthom1927@aol.com), August 26, 2001