Saudi Arabia set to declare price war on Russia

Saudi Oil Minister Al-Naimi has warned non-OPEC oil-producing countries that Saudi Arabia is ready to launch a price war and use the prices to pressure those countries, forcing them to axe their export. “We are first calling on Russia so that it would draw lessons from the past,” the minister went on to say, patently hinting at the 1986 and 1998 oil price breakdowns. Thus, we want to make it clear for all the oil producers that the ongoing situation is catastrophic, and everyone is going to lose.” A similar message could be heard in what Kuwaiti Minister of Industry Abdel Al-Subaihi said. He said that he will not be surprised if the price of OPEC-produced oil slumps by $10 for barrel. He has also stressed that Kuwait will protest against any unilateral reduction of oil production by OPEC in the future. “Hard times of low oil prices are coming, but everything will eventually settle down,” he added. Then, the minister went on to stress the key point in the threats coming from OPEC: “A 10-dollar slump in oil prices will deal a heavy blow to all of us. However, this will most severely affect countries where oil production costs are high.”

True, in Persian Gulf countries, the production cost of 1 barrel of oil does not exceed $3 which is 3-5 times less than the costs in non-OPEC countries. It is a serious argument, and one cannot help but reckon with it. If the price slums further, Russia’s state budget may be revised, which both the government and the State Duma would not be happy doing. The point is that Russia’s income depends to a great extent on the money made from oil sales. The economic growth in 2000 was only possible thanks to high oil prices. All Russian reforms are ultimately dovetailed to the oil market.

According to Russian analysts, a further slump in oil prices will result in small and medium-sized companies going bankrupt. It will be unprofitable for them to sell their product at prices that are lower than the prime cost. Large companies, such as Lukoil, Yukos, and Surgutneftegaz, are sure to survive it. Some of them will even gain. The unfavourable market situation will force Russia’s large capital to make corrections in its investments. Hence, the capital will be withdrawn from some sectors and invested to other, more lucrative industries. This, certainly, is going to be a plus for the Russian economy.

On the whole, there is a concerted position of Russia, Norway, Oman, and Mexico, so there is nothing to be afraid of. However, if the situation unfolds adversely for Russia, the government will have to, after all, adopt a political solution, which will be very hard to do. On the other hand, high oil prices lead to higher costs of the anti-terror campaign, which the USA will not like. Therefore, Russia will have to make its choice then. But what choice – nobody knows.

Dmitri Litvinovich PRAVDA.Ru

Read the original in Russian: http://www.pravda.ru/main/2001/11/16/33898.html