After a price race, oil languishes

Business Materials 2 August 2008 13:16 (UTC +04:00)

(RIA Novosti economic commentator Oleg Mityaev) - From August 1, Russia's export oil duty is a record $495.9 per ton, a jump of $97.8, following a government decision based on high June-July prices.

On July 11, world oil prices established an absolute record of $147 per barrel. But by August 1, one barrel already fetched 16% less, or $123.5. Many analysts believe the recent trend of ever increasing prices is reversing, and oil will get cheaper.

In the beginning and middle of the summer many analysts were predicting oil prices as high as $150-200 per barrel. Gazprom CEO Alexei Miller was particularly outspoken. He said that next year a barrel of oil would cost $250 and believed that 1,000 cu m of gas would sell for $1000.

But all of these "oil gurus" somehow missed the point: prices were so high because speculators played the market and artificially inflated the price bubble. Sooner or later it had to shrink, and that is what we are seeing now. OPEC, the oil cartel that controls 40% of the world's supplies, was wise enough to understand that windfall prices would in the long run slow down the global economy, cut demand for oil and boomerang against them. The United States, the world's largest consumer of oil, began using less gasoline this summer. To counter this, Saudi Arabia, the cartel's key member, increased daily output in June-July by 0.5 million barrel to 9.7 million barrels.

Analysts are now revising their forecasts downwards. Many agree that oil will be just under $100 by the end of the year.

Russian government forecasts give further cause for optimism. The latest from the Economic Development Ministry, issued on July 28, plausibly argues that Urals oil will cost $112 per barrel on average in 2008, $95 in 2009, $90 in 2010, and $88 in 2011.

On the one hand, this means an end to the bonanza earnings Russia has been enjoying for the past few years (currently Russia earns $1 billion from oil daily), and the country will have to slightly cut its expenditures.

But on the other, as the influx of petro dollars slows down so would inflationary pressures. The ruble will also stop strengthening, giving Russian producers much needed breathing space. In this context the authorities may take the opportunity to wean the Russian economy of its dependency on hydrocarbons, for example by fostering innovation. 

Thus the end of the oil boom may benefit not only importing countries, but also oil-producing Russia.

July brought another welcome piece of news for Russia, this time concerning its hydrocarbon resources. A survey by the U.S. Geological Service, published in July, says that the Arctic could contain 90 billion barrels of unexplored oil and 47 trillion cu m of natural gas. Most of the Arctic oil reserves, which the survey says are equal to three times the current annual global production, are located in Alaska, U.S. But most of the gas resources occur in Russia's Arctic, namely the Kara and Barents Seas. And these deposits are comparable to all Russia's confirmed natural gas reserves taken together. The American geologists conclude that such resources will further increase Russia's dominance of the gas market.

However, as long as Russia has enough unused reserves in easier-to-reach places, it is unlikely that the Russian Arctic will be developed anytime soon.

The opinions expressed in this article are the author's and do not necessarily represent those of Trend .