Sunday, March 4, 2007
Russia Sits High Atop Oil Markets - For Now
By Miklos Tassi
Russia, the second largest oil producer of the world after Saudi Arabia, exported 19.32 million metric tons (more than 144 million barrels) to non-CIS countries in January 2007, up 17.7%, year-on-year, the Industry and Energy Ministry said Tuesday. Such heady results for January follow a year that saw Russia earn an estimated total revenue of 139.4 billion U.S. dollars on its oil and gas exports in 2006. Closer inspection of the world energy market, however, raises questions about Russia’s future as an oil superpower.
A recent study by the US Department of Commerce shows that the largest demand for oil comes from freight and human transportation. Such demand is increasingly being met by substitutes for oil-based fuels, but transportation is still expected to draw 50% of world oil usage in the 2030s, the study states. The centers of the growing oil demand are Asia and North-America. The projected long-run tendency of rising prices could be good news for the oil business, but may not reduce the huge demand for oil until substitute fuels become price competitive.
Markets in motion
The USA and Europe consume roughly half of all oil produced globally, approximately 45 million barrels a day. Japan uses a proportionately similar amount, while China and India together burn 10%, with consumption in those two nations rapidly on the rise. Europe is making efforts to decrease its dependence on oil exporters, meaning Russia, to a large extent. Because EU programs to develop renewable energy sources will not be successful enough to make much of a difference in the foreseeable future, the only alternative to Russia is to increase the number of importers and create competition. This raises the issue of change on the supply side of the oil market, with new sources emerging in Asia.
Fate of the oil bear
Russia appears to be fighting hard to maintain its premiere status, which may not be easy, considering its disadvantaged geographical position. The cost of oil extraction is six times higher in Siberia than in Iraq or Saudi-Arabia. Look for Russia to use its political power to offset its unfortunate circumstances, market watchers say. Such trade weapons as suspending deliveries to European customers are historically in Russia’s arsenal. Time will tell if high production costs and increasing competition – along with the rise of alternative fuels – prove the undoing of Russia’s oil supremacy.