Russian roulette
Jul 30th 2004 From
Jul 30th 2004 From
The Economist Global Agenda
The oil price has hit a 21-year high thanks to a bout of nerves about supply from Yukos, Russia’s biggest oil producer. While much of the recent price rise has been due to strong demand, supply is so stretched that it would take little disruption to send the price higher still
THE curious, high-stakes poker game that is the investigation of Yukos, Russia’s biggest oil producer, appeared to have reached a climax this week. On Wednesday July 28th, Steven Theede, the company’s chief executive, said that a freezing of its assets by bailiffs seeking to enforce a 99 billion rouble ($3.4 billion) tax demand could be interpreted as meaning it must stop selling oil. Alarmed at the prospect that Yukos’s output of 1.7m barrels per day (bpd) could be taken off the market, traders pushed the price of West Texas crude up to more than $43 a barrel that day. The price fell back the next day, after a court official denied this interpretation of the asset freeze. However, the fight is still on: the court is still trying to sell Yukos’s most valuable business, Yukanskneftegaz, which is by any estimate worth several times the value of the disputed tax bill. The continued concern about Yukos, set against the backdrop of an oil industry working close to full capacity, sent prices to $43.15 on Friday, the highest level since the Nymex exchange in New York started trading crude 21 years ago.
The erratic behaviour of the Russian prosecutors, and the amazing, though plausible, idea that they might close down Yukos’s production, served to illustrate just how important Russian oil has become. Yukos alone produces 2% of the world’s output, and more than all the wells in Libya. A couple of years ago OPEC, the cartel of oil-exporting countries, was annoyed with Russia, which is not a member, for increasing production while the cartel tried to support the price through production quotas. But with demand booming and supply constrained, the world, and even OPEC, is now grateful for Russian production—it has become the second-biggest exporting nation, after Saudi Arabia. As output from oilfields in places like North America and the North Sea has declined, production from Russia and other former Soviet countries has shot up, by 2.5 billion bpd since 2001. This has helped to meet new demand from oil-thirsty China and other countries.
But suppliers are still struggling to meet worldwide demand. OPEC, which is largely made up of Middle Eastern countries, is under intense pressure to increase production, in order to bring the oil price closer to its official price band of $22-28 for a basket of crudes (which typically trade a few dollars below the West Texas benchmark). In particular, Saudi Arabia (OPEC’s swing producer) has seen its relationship with America (the world’s biggest oil consumer) come under strain, especially since the latest price spike has come in the pre-election driving season. But there is little OPEC can do to relieve the pressure: it is already operating within 5% of capacity. There are even rumours that Saudi Arabia’s state oil company is experiencing production difficulties, suggestions the kingdom strenuously denies.
At these production levels, then, there is little room for any supply disruption. But the unhappy truth about oil is that it is produced in some of the nastiest, least stable places in the world. Iraq is a case in point. Production at its oilfields has apparently risen to 2.4m bpd, much of which is being exported. However, there is a lot of scepticism about just how reliable Iraqi production and exports will be, given the state of unrest in the country. (Currently, exports are coming only from its southern fields because of sabotage in the north.) Production in Venezuela and Nigeria is running close to normal, but both countries have seen disruption over the past couple of years thanks to strikes (over Hugo Chávez’s rule in Venezuela, and work conditions in Nigeria). And a terrorist attack in the port of Khobar in May, which killed 22 workers, showed that even Saudi Arabia is vulnerable.
If the oil price remains above $40, what would it mean for the world economy? Despite the fact that the price is at a two-decade high, the real price (adjusted for inflation) is around half of the level in the early 1980s. Moreover, since the two oil-price shocks of the 1970s, western countries have reduced their dependence on the black stuff.
Still, if oil remained above $40, there would be an impact. Dresdner Kleinwort Wasserstein (DKW), an investment bank, reckons that 0.5 percentage points could be knocked off American growth and 0.7 points added to American inflation in 2006. The effect on Japan, which relies almost entirely on imported oil, would be even greater: it could see its GDP growth reduced by a full percentage point, according to DKW.
But the biggest impact of a high oil price could be on the American voter. Petrol is lightly taxed in America, and so its drivers feel the force of any price rise more than those in other rich countries. If the price climbs much further, they may even be angered enough to vote in a new president.
THE curious, high-stakes poker game that is the investigation of Yukos, Russia’s biggest oil producer, appeared to have reached a climax this week. On Wednesday July 28th, Steven Theede, the company’s chief executive, said that a freezing of its assets by bailiffs seeking to enforce a 99 billion rouble ($3.4 billion) tax demand could be interpreted as meaning it must stop selling oil. Alarmed at the prospect that Yukos’s output of 1.7m barrels per day (bpd) could be taken off the market, traders pushed the price of West Texas crude up to more than $43 a barrel that day. The price fell back the next day, after a court official denied this interpretation of the asset freeze. However, the fight is still on: the court is still trying to sell Yukos’s most valuable business, Yukanskneftegaz, which is by any estimate worth several times the value of the disputed tax bill. The continued concern about Yukos, set against the backdrop of an oil industry working close to full capacity, sent prices to $43.15 on Friday, the highest level since the Nymex exchange in New York started trading crude 21 years ago.
The erratic behaviour of the Russian prosecutors, and the amazing, though plausible, idea that they might close down Yukos’s production, served to illustrate just how important Russian oil has become. Yukos alone produces 2% of the world’s output, and more than all the wells in Libya. A couple of years ago OPEC, the cartel of oil-exporting countries, was annoyed with Russia, which is not a member, for increasing production while the cartel tried to support the price through production quotas. But with demand booming and supply constrained, the world, and even OPEC, is now grateful for Russian production—it has become the second-biggest exporting nation, after Saudi Arabia. As output from oilfields in places like North America and the North Sea has declined, production from Russia and other former Soviet countries has shot up, by 2.5 billion bpd since 2001. This has helped to meet new demand from oil-thirsty China and other countries.
But suppliers are still struggling to meet worldwide demand. OPEC, which is largely made up of Middle Eastern countries, is under intense pressure to increase production, in order to bring the oil price closer to its official price band of $22-28 for a basket of crudes (which typically trade a few dollars below the West Texas benchmark). In particular, Saudi Arabia (OPEC’s swing producer) has seen its relationship with America (the world’s biggest oil consumer) come under strain, especially since the latest price spike has come in the pre-election driving season. But there is little OPEC can do to relieve the pressure: it is already operating within 5% of capacity. There are even rumours that Saudi Arabia’s state oil company is experiencing production difficulties, suggestions the kingdom strenuously denies.
At these production levels, then, there is little room for any supply disruption. But the unhappy truth about oil is that it is produced in some of the nastiest, least stable places in the world. Iraq is a case in point. Production at its oilfields has apparently risen to 2.4m bpd, much of which is being exported. However, there is a lot of scepticism about just how reliable Iraqi production and exports will be, given the state of unrest in the country. (Currently, exports are coming only from its southern fields because of sabotage in the north.) Production in Venezuela and Nigeria is running close to normal, but both countries have seen disruption over the past couple of years thanks to strikes (over Hugo Chávez’s rule in Venezuela, and work conditions in Nigeria). And a terrorist attack in the port of Khobar in May, which killed 22 workers, showed that even Saudi Arabia is vulnerable.
If the oil price remains above $40, what would it mean for the world economy? Despite the fact that the price is at a two-decade high, the real price (adjusted for inflation) is around half of the level in the early 1980s. Moreover, since the two oil-price shocks of the 1970s, western countries have reduced their dependence on the black stuff.
Still, if oil remained above $40, there would be an impact. Dresdner Kleinwort Wasserstein (DKW), an investment bank, reckons that 0.5 percentage points could be knocked off American growth and 0.7 points added to American inflation in 2006. The effect on Japan, which relies almost entirely on imported oil, would be even greater: it could see its GDP growth reduced by a full percentage point, according to DKW.
But the biggest impact of a high oil price could be on the American voter. Petrol is lightly taxed in America, and so its drivers feel the force of any price rise more than those in other rich countries. If the price climbs much further, they may even be angered enough to vote in a new president.
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