Moscow had a Chance to Prevent Oil Price Decline a Year Ago But Didn’t Use It, Inozemtsev Says

Paul Goble

            Staunton, August 26 – From greed, need, or incompetence, Moscow had a chance to prevent the current slide in oil prices but failed to make use of it, Vladislav Inozemtsev says, calling into question all of the Russian media’s suggestions that the decline was the result of either a Saudi conspiracy against US fracking or a US conspiracy against Russia.

            In yesterday’s “Gazeta,” the Russian economist says that as oil prices continue to fall and with them the ruble and the Russian economy, people are casting about for all kinds of explanations; but “no one is recalling what became the most important trigger” of this trend and Russia’s involvement in it (gazeta.ru/column/vladislav_inozemcev/7715405.shtml).

            In October 2014, Putin was celebrating his annexation of Crimea and predicting that the world economy would collapse if oil prices fell below 80 US dollars a barrel. At that time, oil futures stood at 90 US dollars a barrel, making Putin’s position seem entirely plausible. But it soon proved not to be.

            Shortly thereafter, Inozemtsev writes, an OPEC summit took place in Vienna at which the parties were scheduled to discuss cutting production by 1.5 million barrels a day in order to prop up prices.  “The outcome of the debates was not pre-determined,” he says; and “the summit decided to maintain production at its former level.”

            Many analysts at the time blamed Saudi Arabia for this because, they argued, Riyadh wanted to undercut US fracking development. “But were they alone responsible?” Inozemtsev asks, and he suggests not only were they not but that Russia played a role in the subsequent collapse of prices, however counter-intuitive that may seem.

            At the November 2014 OPEC meeting, Igor Sechin, the head of Rosneft and a close ally of Vladimir Putin, flew in and declared, for the first time officially, that that company had “already reduced production by 25,000 barrels a day and was prepared to discuss its further reduction.”

            That was said on November 26, but on the following day, OPEC voted to maintain the existing quotas. That meant, as Bloomberg reported at the time, that Rosneft would maintain production at the current level even if prices fell below 60 US dollars a barrel, the Moscow economist says.

            “Now, let us consider the statistics,” Inozemtsev says. OPEC countries were producing 36.6 million barrels a day in 2014; Russia was producing 10.8 million. “If [Russia] had wanted to support OPEC in the regulation of prices, it should have suggested cutting production by 400-450,000 barrels a day and preferably even more,” not the miserly amount it did.

            Nearly a year later, oil prices have fallen by almost half, and most experts predict that they will decline another 20-25 percent until stabilizing. “The ruble has collapsed to its historic minimums against the dollar and the euro, and there is no basis to consider than it will not surpass those in the coming days.”

            Why didn’t Moscow do the rational thing as far as prices were concerned? Inozemtsev asks rhetorically. The answer lies in the fact that “Rosneft remains the main taxpayer of the country,” and cutting production would thus reduce the income of the Russian state. But now because of what it failed to do in October 2014, Moscow faces a much greater loss of income.

            Most analysts think that at the present time, the amount of oil produced exceeds demand by 1.4 to 1.7 million barrels a day. That will push prices down further as will the return online of Iranian production. Prices will thus fall, and Russia, although not an OPEC member, produces enough to affect prices – or at least it could have a year ago.

            But Russia’s “powers that be haven’t undertaken any steps capable of influencing the situation.” Instead, “like lambs before a farmer with a long knife, they have stubbornly hoped for some miracle which on one fine day will reverse the market trend.”  Had Moscow officials acted to prop up oil prices a year ago, they would have suffered less than they will now.

            Were Russia to cut production now, it would send a signal to OPEC, Inozemtsev says, but that is unlikely: “The Russian authorities continue to be glad about the growth of production of oil,” thus ignoring the fundamentals of the market that the Kremlin likes to insist its denizens are so closely monitoring.