Russia's tightened oil market increasing prices worldwide

Knight Ridder Newspapers ^ | April, 14th, 2006 | Kevin G. Hall

[M. Espinola]

Flat production is causing high prices across the nation

WASHINGTON - For most of the past decade, Russia, the world's second largest oil producer and exporter, provided the extra supply needed to meet the world's growing thirst for oil. Now its production is flat and the world oil market is drum tight.

The timing of Russia's failure to expand oil production couldn't be worse, and experts differ on why it no longer can be counted upon as a swing producer.

Some say President Vladimir Putin is deliberately keeping production flat to keep prices high and expand Russian influence. Others think its more the result of inefficient state-run oil operations. Either way, Russia's failure to boost production as anticipated is contributing to today's sky-high fuel prices.

Andrei Illarionov, until Dec. 27 a top economic adviser to Putin, thinks his former boss is deliberately refraining from pumping more oil.

"It looks like it's true," Illarionov said.

Once called the second most powerful man in Russia, Illarionov fell out with Putin over Russia's 2004 seizure of private oil companies, especially Yukos, then Russia's largest private oil company.

"Americans as well as other consumers are paying the price for destruction by Russian authorities of the Yukos oil company," Illarionov said in an interview with Knight Ridder. "The destruction of Yukos ... means less oil on the market. It means supply is less and demand is there still. It means higher prices."

Anders Aslun, a former economic adviser to the Russian government and now a senior member at the Institute for International Economics in Washington, also believes that Putin is pursuing a strategy to keep global oil supply tight and prices high.

Aslun points to Putin statements in January that Russia is diversifying away from an oil economy.

"For Russia, it's far more important what it is being paid than what it is producing," he said. "Russia doesn't have a strong incentive to invest in oil and gas."

Others don't buy the allegation.

"Illarionov is an extremely bright, disgruntled maverick," said Clifford Kupchan, an energy expert and former State Department official who now heads Europe programs for the Eurasia Group, a risk consultant agency.

Kupchan said that while he doubts Putin is limiting production deliberately, Russia's return to a state oil monopoly has had that effect, because that introduced inefficiency into an oil sector that had been flourishing in private hands.

"I would say that the destruction of Yukos, combined with other non-market impediments to production growth in Russia, have contributed to high oil prices," Kupchan said. Impediments include high taxes on foreign and private oil companies and Soviet-style bureaucratic management.

[GSlob]

If one is to believe the CIA fact-book, the known proved reserves in Russia cover current extraction levels for about 20 years. While 100% extraction is not possible, there probably will be other oil finds, so these things will more or less balance out. Thus one ought not to expect significant expansion there, unless as a short and destructive Stakhanovite stunt.

[sully777]

Oh, is that why we are paying high prices? Damn. (/sarc off)

[M. Espinola]

Putin's Russia is only one of the numerous reasons.