Watching the World: In bed with the bear

Jan. 7, 2002
The CEOs of the major oil companies are often asked where they see the world oil price heading. And they always give an answer something like, "e;There is nothing to be gained trying to second-guess the market. What is more important is stability."e;

The CEOs of the major oil companies are often asked where they see the world oil price heading. And they always give an answer something like, "There is nothing to be gained trying to second-guess the market. What is more important is stability."

However, stability is something that has been lacking in recent weeks.

The price of oil has been steadily falling and the Organization of Petroleum Exporting Countries has been cutting production in an attempt to keep prices up, a tactic that would work under normal circumstances.

OPEC has always taken the view that as long as it had most of the cake, it doesn´t really matter how big the cake is.

But the emergence of a capitalist Russia has changed all that. When OPEC turned the tap down in recent months, Russia stepped in and made up the difference on the market.

As a result, although the Russian oil companies have said they will cooperate with OPEC to cut exports and bolster prices, the men and women on the market floor-who effectively control the world oil price-simply don´t believe them.

OPEC itself accepted Russia´s offer to cut its exports by 150,000 b/d-about 10 min worth of Russian daily production-when it originally demanded more than double that.

Oil traders saw that as an act of desperation by OPEC to show that it can still play international oil politics.

Some go even further and say that OPEC has been naïve in offering a ravenous Russian bear a place at its table-and the opportunity to dine on that important cake.

Lean and hungry

The Russian oil companies, they add, are far from the top-heavy bureaucracies that existed under the communist regime.

They are lean, hungry, and aggressive operators in the market. Oil traders say that OPEC nations, by contrast, have had a captive market for too long.

The old Soviet oil industry played a limited role in the international market, but the new private companies are profit-driven and actively pursuing export markets.

The big Russian operators have made it clear that they can live with an oil price as low as $8/bbl. And a 150,000 b/d export cut during the winter is normal for Russia, because of difficult drilling conditions in its Siberian oil fields and higher domestic demand due to sub-zero temperatures in almost every region of Russia.

The Center for Global Energy Studies, London, has described the present situation as "a political game of bluff and counterbluff. But at the end of the day, OPEC knows that it has to cut production. It is looking for any kind of assurance Russia can give it."

OPEC will meet again in March to review the success, or otherwise, of its tactics and how its relationship with Russia is working.