Streetwise Professor

OPEC had another meeting over the weekend, and Igor Sechin reprised his role as Lucy with the football.  Sechin repeated his fulsome praise of OPEC, and his expressions of Russia’s undying support for the cartel’s actions.  As long as, you know, like, Russia doesn’t actually have to cut output or anything:

Hounded by a pack of journalists on his arrival, Russian deputy prime minister Igor Sechin led a parade of government officials to OPEC’s latest shindig in Vienna. He proposed a slew of things for Russia and OPEC ministers to work on together, such as coordinating (i.e., raising) taxes on foreign oil firms’ crude production and refining operations.

But Sechin, at his third OPEC meeting in six months, again signally failed to promise any big commitments to keep barrels out of the global crude market even as OPEC members said they’d push on with shoring up compliance with their own output cuts.

That’s obviously good news for consumers as Russia, the world’s top oil producer, and OPEC pump almost half the crude used daily globally. Any formal and disciplined coordination between the two could easily spell higher oil prices.

Mr. Sechin claimed Russia cut production and exports in recent months but most OPEC officials weren’t buying it. Exasperated, they say independent data show Russia boosted exports by almost 700,000 barrels a day the past six months, even as OPEC members shaved their own production.

But Russia is still flirting with OPEC and may yet consummate a more formal relationship with the group. For its part, OPEC is still open to the courtship. Mr. Sechin said Sunday that Russia wants, among other things, a “permanent representative” stationed at the OPEC secretariat.

Mr. Sechin said that doesn’t mean Russian OPEC membership but a deeper and wider exchange of data, information, and ideas.

“Flirting.”  Interesting choice of words.  “Exchange of data, information, and ideas.”  In other words, you let us in on your information flow, and we’ll use that to optimize our decisions.  

Sechin claims that Russia will stimulate domestic consumption, as part of a strategy to curb exports:

Russia will cut oil exports and increase domestic oil consumption in a bid to stabilize world oil prices amid the ongoing financial crisis, Deputy Prime Minister Igor Sechin said on Sunday.

“We will be cutting oil exports through the expansion of domestic consumption. In particular, we plan to transfer 2 million tons of fuel to agricultural producers and also increase oil refining inside the country,” Sechin said.

And pray tell how will the government expand domestic consumption in an economy that is continuing to hemorrhage, especially in its energy intensive manufacturing and transport sectors?  And, the best way to divert oil from export to the domestic market would be, as I’ve said numerous times before, to raise substantially export duties.  But those have just been cut again.  And insofar as domestic oil refining is concerned, it has long been a Russian policy objective to encourage Russian refining of domestically produced oil.  Indeed, the duty structure was designed in part to encourage the export of value added refined products in place of crude.  And note that Russia also just cut its duty on refined products too.  Exporting refined products puts as much downward pressure on international prices as exports of crude.

In other words, pay no attention to Sechin as long as his lips are moving.  And never take your eyes off of his hands.    

OPEC seems to be catching on, at long last:

OPEC officials have said privately that Russia — which sees itself as a leader on the world stage — is unlikely to give up its energy independence by joining OPEC. In an apparent allusion to Russia, el Badri on Monday urged “the larger producers” outside OPEC not “to take advantage” while his organization tries to manage crude supply and demand.

Russia “take advantage” of OPEC?  Go on!  Or should that be “что Ñ‚Ñ‹!”?  

Sechin did make one revealing comment.  He suggested greater use of long term contracts in the oil market.  These contracts could be effective in facilitating a division of the market.  They also play into the traditional divide-and-rule strategy.

Sechin framed his proposal as a means of taming those eeeevvvviiiiilllll oil speculators:

The price that the producers would charge under these long-term contracts would take into account the rising costs of lifting and delivering crude, ensuring future investment, he said.  

A system of such contracts would not allow financial institutions to “unreasonably rock the boat,” Sechin said.  

It is clear, however, that as always, Russia sees benefits in reducing transparency and flexibility as means of exerting market power.  In other words, Sechin (and Russia) would like to remake the oil market into something similar to the gas market.  

This is something to be avoided if at all possible.  The nat gas market–especially the LNG sector–is evolving to support more spot trade.  The “gas OPEC” Russia has proposed can be seen as a method to throttle spot trading in gas, and to keep the market relying on opaque, long term contracting relationships that subject the buyers especially to holdup, and reduced competition at times of contract renegotiation (because supplies from other sources are locked in via long term contracts, leaving the original buyer and original seller in a small-numbers bargaining situation.)  Russia’s ability to exploit a fragmented buyers side of the market in such circumstances is well known.  The last thing we need is the oil market to adopt the same dysfunctional structure.  I hope that policy makers in consuming nations are alive to this possibility, and will fight it tooth and nail.  Experience (especially in the European gas market) suggests, however, that my hopes may be in vain.