Russia Ends Honeymoon With OPEC

By boosting oil production while OPEC continues to cut back on production, Russia has ended its brief friendly relationship with the cartel. (image: energytechstocks.com)

Not every oil producer thinks the same way.

Due to the worldwide recession, OPEC has decided to trim back oil production by 5 million barrels per day over the course of the past year. But Russia, another major oil producer, has done the opposite, boosting its production of oil by 6.4 percent during the same time period.

This has caused major friction between the two entities. In recent years, Russia and OPEC have enjoyed a cozy relationship, with Moscow officials even sitting in at OPEC’s meetings to discuss oil market shifts. But, because of Russia’s choice to boost production, OPEC has kicked Russia out of its club.

OPEC and Russia have competing interests at stake. For OPEC, price stability is the utmost concern. Wild price swings in the price of crude oil have wreaked havoc on the budgets and plans of oil producing nations. In order to prevent this from happening again, OPEC wants to see steady price increases or decreases. This has meant supply cuts in response to shrinking oil demand.

However, Russia is hurting badly. Some have estimated that Russia’s gross domestic product could fall by eight percent in 2009 which, in turn, would force Russia to reduce its budget. In response, Russia wants to sell more oil to bolster its finances.  Russia’s maneuvering has created tension with OPEC, as one oil industry analyst explained: “OPEC members have cut almost 4 million barrels per day in order to subsidise the Russian oil industry and economy to the tune of about $150 million per day. This is unlikely to sit well with OPEC member countries.”

The split between Russia and OPEC could affect crude and heating oil prices. OPEC’s decision to cut oil production could lead to an increase in the cost of oil; in particular, if supply is low when demand grows, the price could rapidly climb. And while Russia’s production increase doesn’t come close to matching OPEC’s decrease in production, the move still does have enough of an impact to somewhat offset the cartel’s wishes.

But, more importantly, this could have more long-lasting political implications. Many experts viewed Russia’s coziness with OPEC as a way to thumb its nose at western countries, which wildly condemned Moscow for its military intervention in Georgia last year. But by doing this, Russia has asserted its independence and has shown that it will do what it views is in its best interests no matter what.

So what should we expect to come out of this conflict between two oil giants?  If Russia continues to do the exact opposite of what OPEC desires, it could confuse the market, which could lead to a continuation of oil’s price volatility.