Despite a meeting with Saudi Arabia, Russia can do little to pump up oil production or stabilize the world energy market during a war with Iraq, experts say. The country has already reached its export limit, and Moscow now seems more worried about what Saudi Arabia will do to prevent a sudden price drop after the war ends.
Boston, 19 March 20003 (RFE/RL) -- A meeting between top Saudi Arabian and Russian energy officials has shown how little Moscow can do to keep oil prices in check during the Iraq crisis, analysts say.
Last week, Saudi Petroleum Minister Ali bin Ibrahim al-Naimi flew to Moscow to meet with Russian Energy Minister Igor Yusufov, where they reached an agreement on stabilizing oil prices, according to Russian and Saudi news agencies.
Al-Naimi's three-day visit may have given the market some assurance that the world's two biggest oil producers are cooperating to prevent a price spike on the eve of war with Iraq.
But experts say that only Saudi Arabia has the ability keep prices from soaring out of control, while Russia appears stuck with the same limits on pipelines and ports that have kept its industry in a straitjacket for months.
The situation may bring an abrupt end to Russia's claims over the past year that it has the power to offset actions by the Organization for Petroleum Exporting Countries and provide alternate supplies to the West. The Russian government has promoted the country's oil-producing capacity in proposing energy partnerships both with Europe and the United States.
But Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington, said, "In terms of Russia, they're producing flat out, and they have some infrastructure problems."
Ebel pointed to the restrictions of Russian pipeline capacity and the continuing feud between independent oil producers and the Russian state pipeline monopoly Transneft as limiting factors.
In what could be a classic case of bad timing, Russia's second-largest oil company Yukos said this week that it would cut production by 12 percent because of pipeline problems, the Moscow-based investment bank Troika Dialog reported. Transneft lowered its intake of Russian crude by 9 percent starting on 7 March, according to the brokerage.
Speaking of the Russian oil companies, Ebel said, "They've been somewhat successful in using river and rail to get around the pipeline problems, but there's a limit to that."
Ebel also noted that Saudi Arabia has already been pumping more than 9 million barrels of oil per day for a sustained period to offset low output in Venezuela and slim U.S. inventories. While the country can push to more than 10 million barrels per day, Ebel said there is concern about how long it can do so.
In the worst case, the image of the world's two top oil producers having so little power to raise output may be reason for worry.
Ebel said, "It doesn't give you that warm, fuzzy feeling, does it?" But in the early part of the week, world oil prices appeared to be headed down, not up, even as war with Iraq loomed.
One reason is a report that Saudi Arabia, unlike Russia, has been quietly saving up oil for a rainy day. "The New York Times" reported this week that the country has set aside 50 million barrels of oil that could cover the loss of Iraqi exports for about a month.
Fareed Mohamedi, chief economist of PFC Energy, a Washington-based consulting firm, said that Iraqi exports have already stopped, but the world market has previously "priced in" the stoppage because Iraqi production has been undependable for some time.
The extra Saudi oil is on top of the 600 million barrels in the U.S. Strategic Petroleum Reserve, as well as other stockpiles in most industrialized countries.
Mohamedi said of the new Saudi pool, "That's just sending a signal to the market, don't worry about any potential stoppages." Mohamedi believes the Saudi-Russian meeting was more likely about the risk of low oil prices rather than high ones. Both countries are concerned that the market may already be oversupplied and that prices could drop too far once the crisis subsides.
Mohamedi said, "I think the Russians may have worried that it is going down too fast." Russian officials fear that prices could plunge quickly below their target price of $25 per barrel, blowing a hole in the government's budget. The consultations with Saudi Arabia are likely to have focused on what to do after, rather than during, the war.
While gasoline prices in Western countries have climbed, crude-oil prices in the early part of the week fell from the high $30 range to the low $30 range on confidence that the U.S.-led coalition would end the uncertainty and win the war. The approach of spring in the Northern Hemisphere also ushers in the traditional drop in second-quarter oil consumption, easing price pressure.
Despite those factors, experts warn that prices could still go either way. In recent weeks, warnings of an oversupply have been balanced by a "war premium" of $5 to $6 per barrel, which could now be melting away.
Mohamedi said, "If the war goes really well, then the war premium disappears." But it could also rise suddenly in case of damage to oil fields outside Iraq.
Mohamedi said sabotage of the Iraqi fields would be a long-term concern, but the loss of supply in the short term has already been factored in. Damage to fields in Kuwait or Iran could add $10 to oil prices, he said. Destruction of the Saudi fields would be the worst case, driving prices over $60 per barrel. And Mohamedi said that if that happens, the eventual exhaustion of strategic petroleum reserves would be the market's "doomsday scenario."