Putin to Coordinate Oil Production with OPEC?

Date: 11-18-2011 | Category: Articles, Europe, Russia and Eurasia

Putin to Coordinate Oil Production with OPEC?

11-18-2011

Ariel Cohen and Anton Altman

 

The Heritage Foundation

 

Russian Prime Minister Vladimir Putin announced that his country, the world’s leading oil and gas producer, plans to work closely with the Organization of Petroleum Exporting Countries (OPEC), the oil cartel.

 

Russia has long spoken about linking up with OPEC, but at this point the extent of its participation has been sending high-level delegations to attend OPEC meetings in Vienna as observers.

 

“OPEC is sometimes irritated by us as we, not being a member of the organization, produce more oil, which influences international crude oil prices,” said Putin. “But we will coordinate our work with OPEC.” This is almost word for word what the prime minister said in September 2010. Russia continued to pump away at full capacity regardless of this announcement, exacerbating tensions with OPEC countries.

 

In 2008, faced with plummeting oil prices, Russia considered curtailing production in cooperation with OPEC bystoring the oil rather than exporting it. This announcement from Minister of Energy Sergei Shmatko was enough to buoy crude prices by a few dollars late in the year.

 

Despite this, Russia continued to pump more while OPEC countries cut production to meet output goals. While Saudi Arabia, the oil market maker, produced below capacity, Russia ramped up and surpassed it, becoming the world’s largest oil producer with an output of more than 10 million barrels per day.

 

Now that crude prices are well above OPEC’s 2010 target of $70–80 per barrel, production has been thrown back into high gear. Putin’s remarks coincided with a report released by the International Energy Agency (IEA) predicting that Saudi Arabia will surpass Russia in oil output in about 2015. The agency’s World Energy Outlookcites the inability of output in new fields to match the decline in production from mature deposits in Russia (mainly in the depleted Tatarstan and West Siberia provinces) as the reason for Russia slipping back to the number two position.

 

The IEA report also predicts that Saudi Arabia’s output will reach 14 million barrels per day in 2035, although it is not clear whether it has reserves to back up such production goals. Furthermore, the geopolitical situation in the Persian Gulf remains explosive, with Iran making a bid to acquire nuclear weapons and dominate its Sunni Arab neighbors.

Russia may also not have the necessary reserves to keep up with the Saudis, who have 262.6 billion barrels of proven oil reserves, while Russia has a comparatively small 60 billion barrels as of the beginning of 2011.

 

Whether or not Russia decides to collude with OPEC in setting production goals will have serious ramifications for world energy prices. Russia may not assume a full membership in OPEC, but its collaboration would boost the organization’s cartel-like power. The United States, China, Japan, and Europe—being the principal oil importers—would particularly suffer from the higher crude prices resulting from this collusion if and when it occurs.

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