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Russia: Oil Exports Spark Anger And Warnings Of Price War

Russia's growing oil exports have again come into conflict with the OPEC oil cartel, prompting warnings of a possible price war to control the world market. Higher production may be good news for consumers, but reports say that oil earnings have already dropped for both Russia and OPEC countries so far this year.

Washington, 23 July 2002 (RFE/RL) -- The threat of an oil price war hangs in the air after Russia's rising exports sparked anger among other petroleum-producing countries last week.

The impending dispute raises the prospect of a sharp price decline, affecting revenues in Russia and the Middle East but potentially boosting economic growth in the consumer countries of the West.

On 19 July, the president of the Organization of the Petroleum Exporting Countries, Rilwanu Lukman, warned Russia about its increasing oil output, saying, "Russia is trying to produce as much as it can," the Italian financial newspaper "Il Sole 24 Ore" reported.

Lukman said: "We at OPEC have the reserves and the capacity to respond to any eventual price war with Russia. We don't want a price war, but also we don't want to lose a war declared by others."

On 20 July, the London-based "Financial Times" carried even tougher comments by an unnamed OPEC official, who said: "The Russians are playing a dirty political game with OPEC, and it is becoming very hard to trust them. If they are keen on having a price war, so be it. It is time we abandoned the soft approach and became more aggressive."

The remarks echo frictions that surfaced last December before the 11-country cartel persuaded Russia to contribute to worldwide cuts in oil exports aimed at keeping prices from falling too far. At the time, some OPEC members made the same arguments about weathering a possible price war with Russia because countries like Saudi Arabia can produce more oil at lower cost.

In the end, Moscow agreed to a token reduction that was supposed to mirror OPEC's production cut of 1.5 million barrels per day. But it was never clear that Russia's pledge to take 150,000 barrels out of its daily pipeline exports ever had more than a psychological effect on world prices of oil.

Russia refused to extend its restraint beyond the first half of the year, setting the stage for a showdown with the cartel, which accounts for about 30 percent of the world's output of crude.

But the real reasons for OPEC's new anger are open to question, since few analysts put stock in Russia's reductions from the start. On 19 July, Interfax reported that Russia's oil exports jumped 15 percent in the first five months of the year from the same period the previous year. The figures from the State Statistics Committee only confirmed that Russia's supposed limit never meant much at all.

Russia's Energy Ministry also reported that exports fell by 150,000 barrels per day in June. But early this month, Reuters reported that the official figures did not include a secret allocation of 200,000 barrels per day for Cuba to pay for shutting down an old Soviet spy base. Those exports turned even the short-term cut into an increase, sparking a reaction from OPEC.

The cartel has also been bothered by Russia's new energy cooperation with the United States, which has led to regular shipments by the second-largest oil company, Yukos. Last week, Dow Jones Newswires reported that imports from Russia have made "a serious dent" in Saudi Arabia's share of the market, particularly for light crude, which is favored in the United States.

Russia plans record exports in the third quarter with a 10 percent increase outside the CIS, Interfax reported earlier this month.

Saudi statements last week showed more patience with the situation than Lukman's comments suggest. Reports last week quoted several Saudi oil experts voicing confidence that the situation would remain under control.

Abdullah bin Ali of Arab Petroleum Investment Corporation said Russia's moves "will have little impact on the market in the short term," the AFX news agency reported. He said that OPEC is strong enough to support the price above $22 a barrel, and any action by the cartel and Saudi Arabia will rest on demand for oil and the U.S. economy.

Although world demand for oil has been expected to increase, both Russia and OPEC have suffered from weak prices in the first half of the year. The Iranian official news agency IRNA reported last week that OPEC revenues are likely to drop 7 percent this year. Russia's export earnings from oil fell 6 percent in the first five months, Interfax said.