Russian oil companies are imperiling world economic stability by their unwillingness to cut back on oil production. The refusal of the privatized Russian oil firms, principally the giant Lukoil to curtail their output threatens to negate efforts by both OPEC and non-OPEC countries to put a floor under collapsing oil prices, which last week hit a two-and-a-half year low of $16.65 per barrel.
The announcement by the Russian oil industry that it can manage a mere 50,000 barrels per day reduction for the rest of the year, with the possibility for further cuts in 2002, is useless in the present crisis. This cutback represents just 0.8 percent of overall Russian output, or 1.7 percent of exports. Oil-producing countries had hoped that between Norway, Mexico and Russia, cuts of half a million barrels a day could be agreed.
In an act of great wisdom, the Norwegians last week announced that they would drop output by 200,000 barrels a day. Mexico indicated that it would also cut production by 100,000 barrels provided the Russians made a serious reduction. Unfortunately, the proffered 50,000 barrels a day is anything but a serious decrease. OPEC has agreed a daily cutback of 1.5 million barrels but this, by itself, will not bring market stability. Analysts are agreed that the drop needs to be at least 2 million barrels a day. Without Russian participation, this cannot be achieved.
In the murky world of Russian business, power lies in the hands of those who hold the most foreign currency and at present, those hands are indisputably those of the oil and gas industry. Far from being prepared to cut back its production, Lukoil, Russia’s biggest producer, said this Thursday that it would be investing $1.6 billion to raise output by 1.6 million barrels per day next year. In a depressed market where production already exceeds demand, this is the economic thinking of the mad house. The Russian oil moguls seem to have no sense of the damage that weak and unstable oil prices are inflicting on the world economy. The lessons of global oversupply in the computer chip and automotive markets with the catastrophic effect on individual producers seem to be completely lost on them. It would seem that their calculation is that as long as they can keep their own oil taps wide open, the foreign currency that gives them a prime position in the Russian economy and within the political establishment itself will continue to flow, even though the price of a barrel of oil carries on falling.
President Putin is therefore facing perhaps the greatest test yet of his resolve to bring the lumbering Russian economy back in from the cold. He simply has to find a way to persuade or oblige his turbulent oil chiefs to fall in line with the initiatives taken by both OPEC and Norway and other non-OPEC producers. When all is said and done, though the Russian oil industry is privatized, Putin is running the country and is responsible for its place in the world. If negotiations fail, as they seem to have done, despite the recent visits of top-level international delegations of oilmen, then he must resort to emergency legislation. The action of Russia’s oilmen is a direct challenge to the power and authority of the Kremlin. Putin must demonstrate that he is still running his country.
