Russian Regional Oil Industry on the Edge of Overproduction Crisis

A U.S. victory in the war might ruin the Russian oil industry

The oil industry of the Perm region is on the edge of an overproduction crisis. It is likely that extraction of oil will be reduced later this year.

The outlook for the Russian oil industry in connection with the war in Iraq is a subject that is widely discussed at present. Two relative sources of danger that might hinder the normal development of both the oil industry in particular and Russia as a whole are to be distinguished.

First, if the outcome of the war in Iraq becomes favorable for the United States, world prices for oil will drop. This has already happened, before and after the very beginning of the bombardment. Oil prices dropped by 27 percent due to the expectation of a quick victory. However, prices went up again when it became clear that this would not happen.

Second, a drop in oil exports would be another serious threat to Russian oil. If the United States establishes control over Iraqi oil wells, it will lead to a global and long-lasting reduction of oil prices, since the United States is the world's largest oil importer at the present day.

For the time being, oil prices are at an acceptable level. This can be explained by appealing to various factors. Oil-delivery hold-ups from Iraq and Venezuela are very important in this. The market has also been influenced by a statement from the U.S. secretary of defense, who said that the leadership of the country cannot predict how long the military campaign in Iraq will last. Finally, according to official data, American oil reserves are at a rather low level currently.

The increase of oil-extraction tariffs by OPEC countries was not sufficient to tame the market. Moreover, the coming automobile season is prompting oil refineries to purchase crude at any price whatever. Therefore, American WTI crude costs more than $30 per barrel. However, oil prices are likely to drop in the near future if military actions in Baghdad develop and if American commodity reserves keep growing.

The situation on the world oil market is extremely important for the Perm region, for a share of 47 percent of the oil that is exported from the region is represented by fuel-industry enterprises. These businesses manufacture 23 percent of the entire industrial production in the region. The ruble devaluation of 1998 and the favorable foreign economic situation during from 1999-2000 broke the tendency of decreasing oil extraction in the Perm region. Oil extraction in the region has been growing by 1.6-2.7 percent a year over the last four years. Some of the oil-industry products that are produced in the region is then sold beyond its territory. It is obvious that the Perm region's oil exports directly depend on the world market situation.

In 2000, when oil prices were at a very high level, the of region’s petroleum-product exports were also rather considerable. In 2001, when the situation on the world oil market of worsened, the Perm region's oil exports dropped as well. World oil prices went up in 2002, although not to the level in 2000. It is worth mentioning that the amount of petroleum-product exports from the Perm region exceeded the level of 2000, when the situation was much more favorable.

In 2002, the dynamics of oil extraction and petroleum-product output in the Perm region were positive, despite certain seasonal fluctuations. This growing trend was confirmed in January of this year: There was more oil extracted in comparison with the relevant period in the past year. The positive difference was registered at 4 percent.

The major question for today is the extent to which it is expedient to continue increasing oil extraction in the Perm region against the background of the current situation. According to a forecast by the International Energetic Agency (IEA), world prices for oil are going to drop in 2003 relative to last year. That the regional oil industry depends on the world market allows to assume that the oil and petroleum-product exports will likely drop this year.

The issue of overproduction of crude is becoming very real for the Perm region. The volume of petroleum-product consumption on the territory of the region has either been stable for the last three years, despite the economic growth, or a tendency to decrease can be seen. According to expert estimates, consumption in Russia on the whole does not now have the tendency to grow. Reduction of oil extraction in 2003 would be good for the region against the backdrop of the situation in Iraq, its possible development in the near future and the level of world oil prices.

Olga Denisova Permsky Obozrevatel


Translated by Dmitry Sudakov

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