09-14-2008, 05:24 AM
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Russia's Opec bearhug is something to worry about
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* Richard Wachman
* The Observer,
* Sunday September 14 2008
As if the prospect of a global recession isn't enough, consider the latest threat to world economic stability: an alliance between Russia and Opec, the oil-producing cartel dominated by Saudi Arabia.
That's a scary possibility, as Russia supplies one third of Europe's energy needs, while Opec accounts for nearly 40 per cent of global oil production. Together they produce half the world's oil, so any pact that paves the way for Russia to become a full member of the cartel would present a threat to countries such as Britain, which is becoming increasingly dependent on foreign imports as supplies of North Sea oil dry up.
Don't be under any illusion that an Opec-Russia tie-up would act responsibly by striking a fair balance between the amount charged by producers and the price paid by consumer nations in Europe, America and Asia.
Take Russia's behaviour, for example. Three months ago, Gazprom chairman Alexei Miller, in a display of naked self-interest, suggested that the price of oil could soar to $250 a barrel, at a time when the price had already leapt 39 per cent in 2008 to almost $140.
But is such a merger really on the cards? The Russians would clearly like one: last week, it sent its energy minister Igor Sechin to attend Opec's meeting in Vienna and proposed 'extensive co-operation' with the cartel. A memorandum of understanding is being prepared for signature in the coming months.
An alliance would be a boon for the Kremlin, which has already demonstrated in Ukraine and elsewhere that it is prepared to use oil as a political weapon in order to re-establish its influence over the former Soviet empire.
Oil is Russia's biggest bargaining chip, as the soaraway price has done more than anything else to give it the confidence and clout to re-assert itself on the world stage. A pact with Opec would strengthen Moscow at a time when it has lost friends in the West following its invasion of Georgia and its harassment of foreign companies, such as BP, which have business interests in Russia.
An extension of the oil cartel to include Russia, however, will be hard to pull off. Saudi Arabia, by far the most important Opec member, is a conservative state supposedly aligned with the United States, and may be reluctant to alienate such a powerful ally. But it is not impossible: Opec already comprises countries hostile to the US, notably Iran and Venezuela. So why not add Russia?
Hidden from the debate, however, is the fact that Saudi Arabia is a cartel within a cartel. With 21 per cent of all Middle Eastern proven oil reserves, it is the only country with significant surplus capacity. That means it can cushion itself from price falls by bumping up volume in a way that other countries can't. No doubt that was one reason why Russia has been frantically lobbying behind the scenes for Opec to cut production to keep prices high, as it faces capacity restraints and stands to lose billions in foreign reserves.
Even without the Russians, Opec, under the sway of the powerful Saudis, is hardly a benign force that is seeking to make things easy for the West as recession looms.
Last week, the cartel said it would cut production by around 500,000 barrels, bringing a rebuke from the International Energy Agency, which claimed the move would undermine the price relief that consumers have enjoyed in the last month.
But Opec may have overreached itself: by trying keep the price of oil at around $100 a barrel, it has stoked fears that a recession will be deeper than anticipated and will lead to a slump in demand. As a consequence, oil closed on Friday at just under $100 a barrel and could slide further.
But it will take a long time before Opec's influence diminishes: despite all the talk in the US about green technologies that will help the world reduce its dependence on oil, it will be decades before that happens. Opec will remain a force to be reckoned with for the foreseeable future. The Russians know this, as their action last week demonstrated all too clearly.
Russia's Opec bearhug is something to worry about
</b>
* Richard Wachman
* The Observer,
* Sunday September 14 2008
As if the prospect of a global recession isn't enough, consider the latest threat to world economic stability: an alliance between Russia and Opec, the oil-producing cartel dominated by Saudi Arabia.
That's a scary possibility, as Russia supplies one third of Europe's energy needs, while Opec accounts for nearly 40 per cent of global oil production. Together they produce half the world's oil, so any pact that paves the way for Russia to become a full member of the cartel would present a threat to countries such as Britain, which is becoming increasingly dependent on foreign imports as supplies of North Sea oil dry up.
Don't be under any illusion that an Opec-Russia tie-up would act responsibly by striking a fair balance between the amount charged by producers and the price paid by consumer nations in Europe, America and Asia.
Take Russia's behaviour, for example. Three months ago, Gazprom chairman Alexei Miller, in a display of naked self-interest, suggested that the price of oil could soar to $250 a barrel, at a time when the price had already leapt 39 per cent in 2008 to almost $140.
But is such a merger really on the cards? The Russians would clearly like one: last week, it sent its energy minister Igor Sechin to attend Opec's meeting in Vienna and proposed 'extensive co-operation' with the cartel. A memorandum of understanding is being prepared for signature in the coming months.
An alliance would be a boon for the Kremlin, which has already demonstrated in Ukraine and elsewhere that it is prepared to use oil as a political weapon in order to re-establish its influence over the former Soviet empire.
Oil is Russia's biggest bargaining chip, as the soaraway price has done more than anything else to give it the confidence and clout to re-assert itself on the world stage. A pact with Opec would strengthen Moscow at a time when it has lost friends in the West following its invasion of Georgia and its harassment of foreign companies, such as BP, which have business interests in Russia.
An extension of the oil cartel to include Russia, however, will be hard to pull off. Saudi Arabia, by far the most important Opec member, is a conservative state supposedly aligned with the United States, and may be reluctant to alienate such a powerful ally. But it is not impossible: Opec already comprises countries hostile to the US, notably Iran and Venezuela. So why not add Russia?
Hidden from the debate, however, is the fact that Saudi Arabia is a cartel within a cartel. With 21 per cent of all Middle Eastern proven oil reserves, it is the only country with significant surplus capacity. That means it can cushion itself from price falls by bumping up volume in a way that other countries can't. No doubt that was one reason why Russia has been frantically lobbying behind the scenes for Opec to cut production to keep prices high, as it faces capacity restraints and stands to lose billions in foreign reserves.
Even without the Russians, Opec, under the sway of the powerful Saudis, is hardly a benign force that is seeking to make things easy for the West as recession looms.
Last week, the cartel said it would cut production by around 500,000 barrels, bringing a rebuke from the International Energy Agency, which claimed the move would undermine the price relief that consumers have enjoyed in the last month.
But Opec may have overreached itself: by trying keep the price of oil at around $100 a barrel, it has stoked fears that a recession will be deeper than anticipated and will lead to a slump in demand. As a consequence, oil closed on Friday at just under $100 a barrel and could slide further.
But it will take a long time before Opec's influence diminishes: despite all the talk in the US about green technologies that will help the world reduce its dependence on oil, it will be decades before that happens. Opec will remain a force to be reckoned with for the foreseeable future. The Russians know this, as their action last week demonstrated all too clearly.