The official word from the two behemoths of oil supply runs something like this: Don’t worry, be happy. But when Opec and Russia starting talking of cooperative agreements, the consuming world may want to consider the implications of what, on paper at least, could be the foundation for the new super cartel of the 21st century.

Officially, the news that Russia and Opec will meet annually is all about improving the market visibility for crude oil. And what could be more wholesome than that? Opec and Russia, which isn’t a card-carrying member of the cartel, “have a mutual interest in the predictability and transparency of all factors affecting the oil market,” a press release dispensed yesterday by the cartel informed. Only the paranoid could question such a union, particularly for one whose self-described goal is to calm the world’s consumers of crude.
Whatever the ulterior motives, if any, the freshly announced arrangement is clearly a marriage of convenience, and geologic destiny, with promises of good will thrown in as a bonus. Perhaps there’s nothing more to it than that, in which case we can all go home, turn up the thermostat, and settle in for a long winter’s nap. But it’s the nightmares of what could happen, fueled by history, that keep up us awake. And, so, when Russia, the world’s second-largest exporter of crude after Saudi Arabia, teams up with the oil cartel on any level, the coupling is destined to foment reaction in the wider world, and perhaps a rush to turn the thermostat down after all.
The optimistic perspective (from the consumer angle) is that Opec and Russia are worried that a supply glut is once again approaching. Anxiety of that persuasion garners attention among the producers like wolves do with sheep. After the recent bull market in oil, the pumps around the world are currently running at full or near-full capacity. That’s delivering record levels of revenue for the producers, and more of the same will come so long as demand keeps pushing higher, the presumed outcome among many strategists. Yes, in the long run, growth, like taxes and new indictments from Spitzer, are a given. The short run, however, is another matter.
The Center for Global Energy Studies, a London research outfit, is among those predicting that the future path of oil prices in the near term is any which way but up. As reported by BusinessWeek, CGES forecasts that the oil bull market of recent vintage is paring demand growth globally, which will soon trigger an Opec response in the form of production cutbacks.
The cartel said as much for next year. “We expect the call on Opec crude to decline in the second quarter to 27.8 million bpd from almost 29.8 million bpd now,” Shaikh Ahmad Al Fahd Al Sabah said yesterday via, thereby creating a rationale for production cutbacks.
The oil market seems to agree at the moment, with crude oil falling below $58 a barrel in New York futures trading this morning.
But while traders stay focused on the next tick, rest assured that the forces that have driven the Great Game remain unchanged. On that score, Russia’s recent inclination to be buddy-buddy with Opec will have repercussions beyond what’s outlined in the press releases.
First and foremost is the task of managing supply so that benefits are maximized by the producers and accidents in the form of low oil prices are avoided. Any one who’s studied the history of Standard Oil, the Texas Railroad Commission, Opec, and the other key elements of the oil industry’s history knows that minimizing the natural cycle of boom-bust that’s long afflicted the business is priority one, even in the here and now. Arguably, the boom-bust cycle has evolved in recent years, courtesy of the peak-oil argument. But marginalized or not, boom-bust remains the operating framework by which Opec and Russia lay out their strategic plans.
Russia also has newly hatched (or reawakened?) ambitions for its oil power that extend beyond pure economics. The Kremlin, emboldened by the recent surge of oil wealth in Mother Russia, sees new strategic opportunity as well as profits. Neil Buckley, writing today in the Financial Express, puts his journalistic finger on the point in an insightful essay that’s deserving of a wide audience. “After spending the past year bringing key oil and gas assets back under state control, a string of events have shown how Russia is using its petropower,” he observes. One example, he continues: Russia plans to cut oil supplies to Lithuania next year “in what analysts see as an attempt to press the Baltic republic to favor a Russian buyer over rival Polish and Kazakh bidders for the strategically important Mazeikiu oil refinery.”
Poland? Opec? Mazeikiu? The names are changing, as are the tactics. But the strategic goals are more or less intact from yesteryear as the Great Game rolls on, now playing for a return engagement for its third century of performance.

One thought on “IN GIANTS WE TRUST

  1. Rob

    Another sign that Russia is using its oil for political objectives is the situation unfolding with the Ukraine. Russia is trying to raise the price that Ukraine pays for natural gas by 400% (Dec. 30th WSJ.)
    Given the turmoil in the Middle East (Iraq and Iran in particular), the anti-Western leanings of Venezuela and Bolivia, and the rapid growth of India, China and Brazil will make it very interesting for the American consumer going forward.

Comments are closed.