Zee Beam News

Sep. 18, 2006 - Kommersant - by Sergey Minaev - Russia is in a tough spot, notes "Vlast" columnist Sergey Minaev. Global oil prices are falling so precipitously that Russia's last hope may rest with OPEC. Otherwise, Russia's days in the clover may have ended. In recent years, Russia has already become accustomed to living in conditions of exceptionally high – and continuously rising – oil prices. According to calculations by the IMF, in 2004 the average price for a barrel of oil (meaning the average price for North Sea Brent, American WTI, and Arab Dubai Crude) was $37.76 (growth for that year was 30.7%), while in 2005 it was already $54.23 (growth for that year was 43.6%). This year, oil prices have skyrocketed to unbelievable heights: on July 13, American oil fetched $78.40 per barrel, while Brent on August 7 commanded an even higher price of $78.64 per barrel. Foreigners, in their turn, have already become accustomed to being astonished at what Russians are doing with their enormous oil wealth. In 2005, Russia earned $70.8 billion from oil exports, of which hard-currency revenues in the first half of that year posted by export enterprises were $32.5 billion (a 28.7% annual growth rate). In the first half of this year, export yielded $49.5 billion in profits (a 52.4% annual growth rate). The Russian authorities are eager to explain where that money is going. At the beginning of last week, Russian Trade and Economic Development Minister German Gref said that the volume of the stabilization fund will hit 6 trillion rubles by 2009 and that gold reserves will exceed $300 billion: "that volume will allow us to levelly pursue a course of macroeconomic stability that is indispensable for supporting the country's high investment potential and credit rating." In other words, Russia is already socking away enormous sums and is looking to put away even more. With regard to macroeconomic stability, of course, many questions arise if the authorities currently officially consider a 9% increase in consumer prices over 2006 to be a success. For all that, however, growing oil prices are allowing Russia to report rapid economic growth: last week, the government statistics agency Rosstat announced that in the second quarter the pace of real GDP growth was 7.4%. It is oil prices that are allowing the government to pay off the loan to the Paris Club, a debt that was inherited from the USSR, ahead of schedule. What is more, Russia has let it be known that it will pay off its other debts at an accelerated pace. In general, it is not exaggeration to say that the entirety of the current Russian economy (and in some sense also its domestic and foreign policies) are built on a continuous and significant growth in worldwide oil prices. And now the prices have started to fall, and how! Before the beginning of last week, oil depreciated on world markets for seven trading sessions in a row, something that has not happened since 2003. On Monday, a barrel of WTI was worth $64.85, which is the lowest price since March 28 of this year. Since the record level it hit on July 13, American oil has already decreased in price by more than 17%. North Sea Brent, for its part, cost $63.97 – a bigger decrease than American oil, and in the shorter period since its record high on August 7. The matter is very simple to explain. The Israeli military operations in Lebanon have ended, and the situation surrounding the Iranian nuclear program appears not to be intensifying. Thus international investment and pension funds, which were previously investing enormous amounts of money in oil futures in the hope that they would continue to appreciate in value, have now lost that hope. And if the funds do not believe in appreciation, they believe in depreciation – and rush to sell futures in order to turn them into profit realized from the earlier growth in oil prices. The more the funds sell oil, the cheaper it becomes, and the more incentive there is to sell it. Under such conditions, oil prices may fall for as long as they please. Everyone remembers that periods of very expensive oil regularly give way to periods in which oil is relatively cheap. In 1975-1979, for example, worldwide oil prices were an average of $17 per barrel; in 1980-1985, they doubled to $33 per barrel; and in 1986-1989 they were back to an average of $18.5 per barrel. The turning point came exactly twenty years ago, in 1986, with a catastrophic decline in oil prices that the USSR could not survive. The matter has advanced to the point that on Monday the OPEC oil-producing countries, during their conference in Vienna, definitively made it known that, for the first time in a long while, a decision to cut back on production may be made in order to forestall a sharp drop in prices: "Everything will be done to ensure that prices stay at the crucial level, and the members of OPEC are prepared to undertake quick and decisive action in response to events in the market that threaten their interests." Such an event would have to be revolutionary, if it is taken into account that, in connection with sharply rising prices, in recent years OPEC has practically discarded its system of production quotas, and after Hurricane Katrina the organization promised to help the world with an additional two million barrels of oil per day. Among the factors that were enumerated as causes of the drop in prices were a significant growth in oil extraction that is expected in the next year, a possible slowdown of worldwide economic growth, and a weakening of geopolitical tensions. It is necessary to note that even a possible production cut by OPEC will not necessarily make an impression on investment and pension funds – they ultimately can only assure themselves that there will be more than enough oil on the market. However things turnout, though, all Russia can do now is regret the end of the Israeli military action and hope for some self-sacrifice from Arab oil producers.