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Russia: Middle East Tensions And Cooperation With OPEC

Conflict in the Middle East has added $5 per barrel to oil prices, raising profits for OPEC producers and Russia, analysts say. The sudden jump has also taken the pressure off Moscow to stand by its promise that it would cut oil exports in cooperation with the oil cartel.

Boston, 5 April 2002 (RFE/RL) -- Middle East tensions may have ended a debate over Russia's cooperation with the Organization of Petroleum Exporting Countries (OPEC) as prices this week hit their highest levels of the year.

Analysts cited security concerns for driving oil prices above $27 per barrel on the New York Mercantile Exchange, nearly 50 percent above levels last December when Russia agreed to trim its exports to meet OPEC demands.

Experts say that fighting in Israel has added to fears of a possible conflict with Iraq to create an increasingly costly "war premium" for oil.

Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington, told RFE/RL: "It's been going up. If you asked me a week ago, I would have said it was $3. Now, I'm saying $5."

In other words, oil would probably be selling at about $22 per barrel, if only the forces of supply and demand were considered without the worries about Middle East supplies.

Ebel said: "The fundamentals are really the same as they were before. There's no shortage of oil out there that I know of."

Twenty-two dollars is at the bottom of the target range that OPEC has set and that it has tried to maintain by taking 5 million barrels per day out of production since the start of last year. The top of the range is $28.

On 3 April, oil prices eased slightly after both the American Petroleum Institute and the U.S. Energy Information Administration reported increases in inventories of crude.

The market also calmed down after major producers largely ignored Iraq's call over the weekend for an oil embargo against the United States to protest Israel's military actions against Palestinians. In fact, Iraq's own oil exports resumed their normal levels of 2.3 million barrels per day last week. They had dropped in the past month due to a dispute over the United Nations "oil-for-food" program.

But the market's new motivators seem to have brought an end to a three-month-old controversy over Russian oil production and whether it has helped to drive prices up or down.

Last December, OPEC convinced Russia to declare it would cut exports by 150,000 barrels per day in the first quarter of the year to help keep prices from falling too far. Last month, the 11-member cartel again persuaded Moscow to renew its pledge for the second quarter, despite opposition from some of Russia's biggest oil companies.

But industry analysts have been skeptical about the Russian promises from the start, and reports this week have supported their doubts.

On 2 April, the Reuters news agency quoted a Russian Energy Ministry source as saying that Russia's crude exports rose by 130,000 barrels per day in March. Last month, the Prime-TASS news agency reported that Russian exports in January and February rose 7.7 percent from the year-earlier period.

The picture is complicated because the government argues that its cut was only supposed to be compared with exports in the third quarter of last year and only applied to pipeline exports.

But yesterday, Reuters gave the most concise measure of whether Russia has lived up to its promise or not. The news agency said Russia had exported 2.65 million barrels of crude per day in the first quarter of this year, an increase from both the third and fourth quarters of last year, as well as the first quarter of 2001.

Reuters was careful to cite only exports of Russian crude by the state pipeline monopoly Transneft and to exclude transit oil from Kazakhstan and Azerbaijan, fitting the precise terms of the OPEC agreement. Even under this narrow definition, Russia increased exports by 40,000 barrels per day from the third quarter of last year instead of decreasing them by 150,000. Other reports note that Russia has greatly raised its oil exports by sea and rail.

Russia's RIA-Novosti news agency quoted Energy Ministry data showing that oil production rose 7.6 percent in the first quarter from a year earlier, an amount that the Russian economy was unlikely to absorb on its own. This week, the government said the economy grew at a slower 3 percent rate during the first quarter. The clear conclusion is that, by any measure, Russia has been exporting more oil, regardless of what it tells OPEC.

But the broken promise hardly seems to matter anymore, because oil prices have been rising with the risk of Middle East conflict, regardless of how much oil is being produced. Robert Ebel noted that OPEC countries have also been producing above their assigned quotas in amounts that are far greater than Russia was supposed to cut.

Ebel said: "We don't really call it cheating. We call it degrees of compliance."

There is some tragic irony in the situation, because while Middle East producing countries have condemned the conflict in Israel and the threat of one with Iraq, they are also profiting from the higher oil prices that have come about as a result.

Russia is also likely to see a recovery in its revenues in the short term. But Ebel warned that if prices reach $30 per barrel, world economic recovery could stall, forcing OPEC and Russia to deal with falling prices again.