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Russian oil changing the Opec game
By George Trefgarne, Financial Correspondent (Filed: 05/11/2001)
ARAB countries' control of the oil market is being loosened dramatically by a fall in demand and increased production from Russia, according to the latest research.
Price rigging: Opec may have shot itself in the foot with its oil pricing strategy
The growing weakness of the Opec oil-producing countries will be a relief to the White House and Downing Street. There have been fears that the war in Afghanistan could cause a re-run of the 1973 oil crisis, which brought the world economy to its knees.
That crisis began when Egypt and Syria attacked Israel on the Yom Kippur holiday and most Israelis were at the synagogue. A week later, Arab countries began an oil embargo as punishment to the West for supporting Israel.
However, since then, Opec's share of production has been on a long-term downward trend and in the past year has dropped from 36.5pc to 35pc. At the time of the 1973 crisis, Opec controlled about half of the world's oil supplies. New wells in the North Sea, the Caucasus, Canada and Alaska have cut Opec's share to only about a third.
The main source of new oil is Russia. Its production is expected to reach 8.5m barrels a day this year, a 30pc increase over the past two years and taking it above Saudi Arabia for the first time. By next year, it is forecast to hit 9m barrels a day. This helps explain the efforts of President Bush and Tony Blair to court President Putin in Moscow.
A new analysis from the energy team at Deutsche Bank - entitled Will Economic Recession Outflank Opec? - says that Opec is now in a very weak position. It has committed itself to holding the oil price at about $25 a barrel by cutting production, but this has failed.
The benchmark price for a barrel of crude for delivery in December slipped below $20 last week as the slowdown in the world economy, coupled with the warm winter, has caused demand to fall.
Opec needs to cut production further to stop another slide in the price but "quota overproduction runs rampant," says Deutsche Bank. Even so, Opec is running at only about 82pc of capacity, the lowest for 25 years. "In such an environment," says Deutsche Bank, "we think it will be difficult for Opec to defend $25 basket prices."
Further, Opec appears to have shot itself in the foot through its price rigging. The higher the oil price, the greater the incentive for Russia to produce more. Russian oil companies, such as Gazprom and Yukos, have historically been inefficient, but they can export profitably as long as the oil price remains above $14.
However, Russian exports are hampered by the country's oldest strategic problem: the lack of deep-water, ice-free ports.
Mikhail Khorodovsky, chairman of Yukos, told Forbes Global magazine this week: "In Russia, the problem is we don't have them."
-- Martin Thompson (email@example.com), November 05, 2001