Russia's rising oil output has confounded OPEC and industry analysts. But in spite of growing oversupply and a government promise to cut back, Russian producers are showing no signs of slowing down.
Boston, 12 February 2002 (RFE/RL) -- Russia's oil policy has succeeded in confusing the market and the media, producing seemingly contradictory reports in two leading Western newspapers on the same day.
On 9 February, "The New York Times" and the London-based "Financial Times" carried conflicting stories on Russia's agreement with the Organization of Petroleum Exporting Countries (OPEC) to cut oil output in the first quarter of 2002.
"The New York Times" headline reported, "Russia Says It Is Upholding Promise on Oil Export Curbs." The "Financial Times" headline read, "Oil producers failing to honour output pledges." On the surface, it was hard to see how both could be right.
"The New York Times" cited a statement in early February by Russian Energy Minister Igor Yusufov, saying Russia had lived up to its promise in December to lower exports by 150,000 barrels per day. The 10 participating nations of OPEC had extracted pledges from Russia and other non-OPEC producers before agreeing to drop its own daily exports by 1.5 million barrels to avert a price plunge.
But most of the data cited in "The New York Times" story seemed to support the opposite conclusion about Russia's promise. The paper quoted the industry newsletter "Petroleum Argus" as saying that Russia's oil exports in January were unchanged from the previous quarter, while export curbs had led to a glut of oil at home.
By contrast, the "Financial Times" report suggested that neither Russia nor OPEC were living up to their promises. In the case of OPEC, which sets quotas by output rather than exports, January production was down by less than half the agreed amount, the Paris-based International Energy Agency estimated.
In the case of Russia, which said only that it would reduce its crude exports, the paper cited suspicions of unnamed "observers" that any excess oil would be sold as refined products on the same overloaded market.
The issue goes beyond the confusion of clashing headlines. In recent months, Western markets have set world oil prices based on how well OPEC and non-OPEC nations are living up to their December deal. So far, prices have held up remarkably well, considering the many signs that the bargain has gone bad.
The economic consequences of a price slide would be felt around the world, with a wide range of possible effects. Relatively low oil prices are aiding economic recovery in the United States, making OPEC hopeful about revenues in the second half of this year. But falling prices could prove damaging not only for producing nations but also possibly for economies like Japan and China, which are already fighting deflationary pressures.
In fact, the oversupply problem may be even more serious than reported. At his press conference last week, Yusufov said that over 4 million tons of refined products had built up in storage in Russia, the RIA-Novosti news agency reported.
The country has experienced an unusually warm winter in many regions this year. Yusufov said that prices of some refined products have fallen by up to 50 percent, while crude oil has slipped to about $4 per barrel on the Russian market.
In January, Deputy Prime Minister Viktor Khristenko told the ITAR-TASS news agency that the government was considering a plan to create a strategic oil reserve, which could help to sop up the excess. But no more has been heard of the idea, and it is unlikely that it could act in time to buoy prices in the near term.
In January, the Prime-TASS news agency reported that Russia's oil production in January rose 8.6 percent from the year-earlier period, while oil exports to non-CIS countries climbed 9.9 percent.
And although "The New York Times" cited "Petroleum Argus" as saying that Russia's first-quarter exports were unchanged, the newsletter reported in early February that the country's pipeline exports in January came close to a post-Soviet record. It had previously reported statements by Russian officials that the promise to OPEC applied only to pipeline exports, suggesting no compliance with the December deal at all.
Perhaps more important, "Argus" cited a speech by Prime Minister Mikhail Kasyanov at the World Economic Forum in New York in which Kasyanov was quoted as saying, "We have no agreement with OPEC." The cartel's secretary-general, Ali Rodriguez, is expected to visit Moscow in March in an attempt to persuade Russia that it should extend its supposed cuts into the second quarter of 2002.
But the chances for an extension appear slim. From a political standpoint, Russia seems determined to take back the influence that it held in the oil market during the Soviet era.
On a business level, most of the country's oil majors have already announced plans to boost 2002 production. Yusufov recently said the Russian industry plans to raise output by 6 percent in 2002, far more than the increase in either domestic or world demand.
As the year goes on, so does the risk that Russia's oversupply will spill over into foreign markets, driving down prices. But on 10 February, RIA-Novosti quoted an OPEC source in Vienna as saying the cartel cannot push Russia too hard on the subject of cuts.
The official reportedly said, "OPEC cannot afford to assume an offensive position," adding that "good relations with Russia, the world's second largest oil exporter, are too important."
One reading of the statement is that Russia may have already succeeded in gaining the power over the oil market that OPEC has lost.