Oil pricing problem
21/02/2003, Victor Serov
This week on the world oil markets started from an important news. On 17 February an information appeared in mass media about a sratement made by high ranking OPEC officials that there was a possibility that the organisation would abstain from the quota policies for the oil production in the non-OPEC countries.
That is, to distantiate themselves from their proper function as a collective body, seriously influencing the world oil market. It will happen, if military actions start in Iraq. Undoubtedly, all the OPEC countries will use this possibilty to occupy those free spaces on the market at least temporarily that will be released when the Iraqi oil deliveries are ceased because of the war and the oil export from Venezuela is temporarily lowered.
There can be only one result of this action. Either there won't be any growth of oil price after the beginning of military actions in Iraq, or it will be very short-lived. Moreover, this decision by OPEC can indirectly entail other steps on the world oil market that will influence a fall of prices or their stabilisation. For instance, Venezuela would rather be interested in returning its poistions on the market, which they it recently lost due to inner problems.
A week before, other international organisations that are capable of influencing the world oil market declared about such steps. But the main "player" here is OPEC. The organisation realises well that an abrupt growth of prices at the beginning of the war will most probably be changed by an abrupt fall of prices. For OPEC not such oscillations, but a maximum possible stability of the average prices is preferrable. And therefore the OPEC is ready to cancel the limits on oil production for its members. By the way, already on 17 February, on the day, when the information on a possible action of OPEC appeared, the oil futures prices fell by 1.5%-1.8%.
What would it all mean for Kazakhstan? The first conclusion is that the high growth of oil prices maybe will not occur after the beginning of the Gulf war. It means that the national exporters most probably would not manage "to accumulate fat" before hte possible long term fall of oil prices when the USA take the Iraqi oil under their control and will "splash it out" on the market. Already now they say that since the second hald of 2003 the prices can fall significantly. By then the Iraqi army would be desrtoyed, the USA would take the main oil field under their control, recover the infrastructure and the oil would start to come to the international market already without the limits imposed by Saddam Hussein. The fall of world prices will visibly touch all exporters and Kazakhstan is not an exception. But it was possible to get ready for it during the first weeks of the war, when the prices were high. Now, if OPEC members do what they talk about, most probably there won't be such possibility.
The second conclusion is similar to the first one, but it's valid for a longer term. Most probably even after a defeat of Iraq and the establishment of US control the OPEC member countries will continue selling oil in the very big quantities on the market. A lot of time is needed to return to the quota regime. There already were cases, when this prganisation members showed more egoism than solidarity in these issues. It means that the prices will fall not only to a very low level, but also for a long time and our economy will have to exist in such a regime. For Kazakhstan it means various unpleasant consequences. It is a lowering budget income and lowering volumes and speed of foreign investments inflow as well as a delay in the deveklopment of certain important oil production projects. We should emphasise the latter point. When the USA will become virtual owners of the Iraqi oil reserves, they themselves, and not Caspian Sea, will become the main world magnet for the investments into oil production.
What should we do to smooth over this unwanted effect that is so likely to happen? The main thing apart from general economic measures, it is necessary to work very quickly and efficiently to lower the prime cost of the production and transportation of Kazakhstani oil. Of course, it will never be able to be compared to Arabic or Persian oil prime cost and it will never even get close to them, but, as the experience of Russian companies producing oil even in Siberia the costs can be lowered significantly.