Streetwise Professor

April 14, 2009

Yes, Russia is Messing With OPEC (And I cleaned that up)

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 6:40 pm

Commentor lisa castigates me for illogic/inconsistency in my analysis of Russian oil export policy, and what I claim is its serial dishonesty with OPEC.  You’re wrong, lisa, and I have the data to prove it.

In a nutshell, my analysis was: (a) that Russia was not choosing its oil export duty to discourage exports as part of a cooperative strategy with OPEC to raise world oil prices, (b) that to the contrary, Russia was choosing its oil export duty to maximize revenues, and take advantage of OPEC’s output cuts by selling as much oil as possible at the higher price produced by OPEC output cuts, and hence (c) Russia’s professions of solidarity with OPEC are deeply dishonest.  

From today’s Bloomberg:

OPEC agreed at three meetings last year to cut output by 4.2 million barrels a day, a 14 percent reduction to 24.845 million, as prices fell from a record $147.27 on July 11. The group reduced pumping by 1.2 percent in March, according to a Bloomberg News survey of oil companies, producers and analysts. The 11 members with quotas produced 25.06 million barrels.

As shipments declined, deliveries from exporters that aren’t in OPEC rose by 670,000 barrels a day in January. Russian overall exports climbed 6.3 percent in February and 2.2 percent in March, according to the Energy Ministry. Brazilian total exports more than doubled in both February and March, according to Brazil’s Trade Ministry.

The IEA has similar data for the period over which OPEC was cutting.  According to the IEA March report (the April report is subscription only), in December, Crude seaborne exports from the former Soviet Union (FSU) rose 410m bbl/d over November (ex BTC pipeline, which is mainly Azeri exports).  Total exports ex BTC rose 640m bbl/d (this includes some Kazahk exports via the Druzhba pipeline) in December vs. November.  Transneft exports rose 590m bbl/d.  In January, total seaborne exports ex BTC rose 150m bbl/d relative to December, and total exports ex BTC rose 170m bbl/d.  Transneft exports fell slightly.  

Russian product exports also rose.  Total exports of refined products from the FSU rose 150m bbl/d Nov-Dec, and another 150M bbl/d Dec-Jan.  Russian exports increased more than this, because, as IEA states, Ukraine and Belarus banned fuel oil exports during the Gas War.  

IEA also states that Russia oil production increased in January.  At the same time Russian oil output was nudging upwards, domestic consumption was falling dramatically due to the dramatically weakening Russian economy (a pronounced weakening that the IEA report remarks about several times):

Given the worsening economic outlook for Russia coupled with dismal oil demand readings for January, we have sharply revised down our oil demand prognosis for 2009.  Total oil product demand contracted 7.2 percent year-on-year in January, according to preliminary data, with all product categories bar gasoline posting sharp losses.  In particular, LPG, gasoil, naptha, and residual fuel oil–barometers of industrial production and power demand–shrank by 21.2%, 7.3%, 5.1%, and 4.0% year-on-year, respectively.  Moreover, a product associated with both consumer confidence and air freight–jet fuel/kerosene–fell by 10.4%.  [Note that since these are year-on-year figures, and consumption had increased from last January into the 3rd quarter, the falls in domestic consumption since 3Q08 are even larger than these figures.]

If Russia had been choosing its export duty to reduce exports as part of a coordinated strategy with OPEC to support oil prices, basic economics implies that: (a) exports would fall, (b) output would fall, and (c) domestic consumption should rise, or at least fall by a smaller amount than output (as setting taxes to reduce exports should divert output into the domestic market).*  In fact, (a) exports rose, (b) output rose slightly, and (c) domestic consumption plummeted. This pattern is consistent with my earlier analysis of the level of the Russian oil export duty. In essence, Russia set the export duty to divert supplies from the domestic market to the world market, exactly the opposite of what it would have done if it were acting in concert with OPEC to raise world prices.

In contrast, it is interesting to note that February 2009 OPEC output was approximately 8 percent lower than in the fourth quarter of 2008, and almost 10 percent lower than in the third quarter. Declines in Saudi output have been even more dramatic, falling 16.5 percent from their third quarter levels, 11 percent from the 4th quarter, and 5 percent from December.

In brief, it is abundantly clear that Russia set its export duty to take advantage of OPEC output cuts, encouraging exports, encouraging output, and stifling domestic consumption, rather than discouraging exports and production and encouraging domestic consumption, as would have been the case that it was attempting to reinforce OPEC actions.

And OPEC has noticed. From the Bloomberg piece:

Algerian Oil Minister  Chakib Khelil, who held the group’s rotating presidency in 2008, said March 17 that he was disappointed Russia hadn’t cut production to support prices. Suppliers need prices in a $60-to-$75 range to support production of higher-cost resources, Saudi Arabian Oil Minister  Ali al-Naimi  said on March 16 in Geneva.

Russia also lowered export duties this month to $15 a barrel from $15.70 in March to boost exports, the IEA said in the April 10 report. Brazilian production will rise 7.2 percent in 2009 to 2.54 million barrels a day, the IEA said.

And from the WSJ:

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.

As I’ve said before, this is actually one Russian policy that I endorse.  Undercutting the OPEC cartel is just dandy with me.  

That said, the whole episode demonstrates that Russia’s public statements about its policy goals are completely unreliable.  You need to look at what they do, not what they say.  And the oil case is an excellent example of how their actions give the lie to their words.

Combine this with Turkmenistan’s fury over the gas explosion (and the drastic cut of purchases that apparently caused it), the ongoing rancor between Ukraine and Russia (for which Ukraine also bears substantial culpability), the frictions over energy with Poland, Lithuania, and Belarus, and you get the picture.  The Russian Dale Carnegies: Putin, Sechin, and Lavrov, winning friends and influencing people through energy policy.

* Holding demand constant, a change in export duty intended to reduce exports to help support the world price would lead to a rise in domestic consumption.  Both world demand and domestic demand were likely falling, certainly in November-December, and domestic demand into 1Q09.  With falling for Russian oil, if Russia had chosen its export duty in coordination with OPEC output cuts in order to support world prices, exports should have fallen.  Exports can decline due to  a reduction in output and a smaller fall (or rise) in domestic consumption.  To help support the world price, declining export and domestic demand should have resulted in a decline in output, and a smaller decline in domestic consumption.  As noted above, however, Russian output increased slightly, and domestic demand plummeted.

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2 Comments »

  1. It really is the height of ludicrous neo-Soviet Russian behavior to suggest that we might believe Russia can afford to choke off oil exports. You might as well suggest a person can stop breathing whenever he wants. Idiots.

    Comment by La Russophobe — April 15, 2009 @ 7:40 am

  2. […] his concessions to Moldova’s liberal opposition, Voronin, a former Soviet Interio Yes, Russia is Messing With OPEC (And I cleaned that up) – streetwiseprofessor.com 04/14/2009 Commentor lisa castigates me for illogic/inconsistency in my […]

    Pingback by Ладушки.Net » Blog Archive » Posts about Russia as of 15/04/2009 — April 15, 2009 @ 1:00 pm

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