Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

OPEC Ratifies 5% Cut in Crude Oil Output

Unknown
As OPEC leaders decided to cut oil production 5 percent Wednesday to keep world prices steady and high, Russia remained an interested — yet complacent — observer.

Russia is in no position to take advantage of higher oil demand on international markets. Already pumping all it can, Russia's pipeline and transport capacity is limited, and expansion of the export infrastructure is fraught with political tumult.

The world's No. 1 oil producer, Saudi Arabia, led the push for a reduction of 1.5 million barrels per day to 25.2 million. Iran pushed for a larger reduction of 1.7 million bpd, but was unsuccessful.

The Organization of Petroleum Exporting Countries wants to prevent oil from slipping below $20, let alone collapsing back into the single-digit prices seen in 1998.

"Stocks are increasing, and in the second quarter we saw a sharp fall in prices coming," said OPEC Secretary-General Ali Rodriguez. "We wanted to maintain the stability of the market and, of course, of prices."

OPEC was blamed last year for stirring inflation by moving too slowly to restore output curbs that propelled oil prices from 1998's lows to a $35 high for benchmark Brent three months ago.

OPEC leaders have said they wish to keep their crude, which is of a lower quality than U.S. light crude, at $25 per barrel. OPEC oil is currently trading at less than $25 per barrel.

The United States and the European Union had urged OPEC to consider maintaining output or at least make only a modest reduction, and in practice they may have less to fear than originally thought. Experts said deliveries were likely to subside by closer to 1 million bpd than the 1.5 million official cut as some countries were now having trouble meeting their quotas.

Higher oil prices could lead to inflation in oil-consuming countries, which is already fueling fears of recession in the United States, which sent Energy Secretary Bill Richardson on a whirlwind tour of the Persian Gulf countries to argue the U.S. case to OPEC ministers.

"My concern is that some of these countries are getting too happy with oil at $30 a barrel," Richardson told The Washington Post. "Oil at that price is not good for the world economy." The slowdown will have negative ramifications for the producers as well, he added.

In the days leading up to the meeting, the price of oil had shot up. For the first time in a month, crude futures surpassed the $30 mark on the New York Mercantile Exchange.

Russian consumers probably will be little affected, if at all, because Russia — being the world's second-largest oil producer after Saudi Arabia — doesn't rely on imports to run its economy.

And prices on the domestic market have historically been much lower than those on international markets, said Tatyana Demidova, an analyst with Kortes Statistics.

"In the near future, OPEC is not going to have an effect on oil prices on Russia's domestic market," Demidova said. Russia has more pressing issues such as haggling over taxes with the federal government.

Russian crude has actually seen a fall in prices since November, when the Urals benchmark traded for $23 to $24 per barrel. Today, the same crude sells at $15 to $16 a barrel, half of what the U.S. benchmark goes for.

Even though Russian producers are faced with low prices at home, 40 percent of what they produce is exported abroad, so they still stand to benefit from high world prices.

Russia tends to respond to the changing levels of worldwide prices faster than other non-OPEC countries, said Julian Lee, senior energy analyst with the Center for Global Energy Studies in London. "Last year, we saw an increase in production — in light of high oil prices — because Russian oil companies had the cash on hand to expand operations," Lee said in a telephone interview.

But Russia's path to increasing capacity is riddled with hurdles, said Sergei Yesaenko at the Cambridge Energy Research Associates' office in Moscow. "It's purely a technical problem," Yesaenko said.

A well-known example of this is the Baltic Pipeline Co., which was liquidated by transport monopoly Transneft last year. Oil companies were to become shareholders in this new company, and their participation would have guaranteed volumes to make the pipeline commercially viable. However, a government resolution last year declared that Transneft would remain the sole owner, hampering the pipeline's development.

Even if Russia does manage to increase production despite the problem-besotted Transneft, it will be no threat to OPEC, Lee said.

"There's not a single country in the world that can make up for the 1.5 million barrels per day that are about to be taken out of production," he said.

The OPEC member nations are Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Algeria, Libya, Nigeria, Indonesia, Qatar and the United Arab Emirates, and together they account for about 40 percent of the world's total output.