Russia is the biggest oil producer outside the Organization of Petroleum Exporting Countries (OPEC). In fact, depending on which figures you look at, and I am looking at Wikipedia, Russia is the biggest producer of oil in the world, producing a little over 10.5 million barrels per day. Saudi Arabia, who is an OPEC member, is a close second with figures at 8.8 million barrels. Russia and the Saudis are also the biggest exporters of oil in the world. Again depending on whose figures you believe, Russia is slightly ahead of Saudi Arabia as the number one oil exporter. So should Russia join OPEC? The short answer is NO!
There are currently 12 members of OPEC, with Saudi Arabia as the key member, not least because it is the biggest producer. Other Middle Eastern members include UAE, Iraq, Kuwait, Qatar and Iran. In Africa, Libya is a key OPEC member. Although the USA is the 3rd biggest oil producing nation, they are a net importer. In fact the USA is the world’s biggest consumer of oil with consumption of almost 20 million barrels per day. China comes a distant second with consumption of 8 million barrels per day with Japan in 3rd with 3.4 million barrels. The point here is that the USA is by far the biggest consumer and therefore the most sensitive to oil price swings. OPEC’s ability to manage the oil price is important for the USA, their economy and the US dollar. As we know, oil is priced in the USD around the world, ensuring its status as the world’s reserve currency.
OPEC’s ability to control the world oil price on a pure demand and supply basis is decreasing. The key swing producer of course is Saudi Arabia, as they are the largest producer in the OPEC bunch. If cuts are needed to keep the oil price above USD 80 then Saudi Arabia makes them, and if extra supply is needed to keep the oil price below USD 100 then the Saudis pump more oil. The second largest producer in OPEC is Iran, who some would say is the arch-enemy of Saudi Arabia, not least because Saudi Arabia is a pro USA faction of OPEC. This makes OPEC a kind of Saudi versus Iran arena, and if Russia were to become part of this complex, then they would at the very least be unnecessarily complicating life for themselves politically. In fact it is entirely possible that the last OPEC meeting in June, which collapsed into disarray was the last OPEC meeting ever.
The International Energy Agency (IEA) which is predominately a consumer based group of nations has recently and publically been calling for OPEC and the IEA to merge. Russia is not part of either group, neither is China or India. For the most part, the IEA and OPEC are usually on the opposite end of the spectrum, with IEA and its consumer members calling for lower oil prices and therefore more production, while OPEC usually wants oil prices in the higher end of the range and thus cuts production. On this basis it is unlikely that OPEC and the IEA will work together under a single framework.
So where does all this leave Russia? Could it be that Russia is in fact quietly looking at new market infrastructure when it comes to trading oil and Gas? Certainly on the gas side, Russia has been the prime mover in the creation of the Gas Exporting Countries Forum (GECF), commonly referred to as the gas OPEC. Qatar and Iran are also members of the GECF. Russia, Iran and Qatar are the number one, two and three holders of gas reserves respectively in the world, with around 50%. As the world market in Gas grows, and begins to rival the influence of the oil market on economies around the world, Russia’s political and economic influence, and responsibility will also grow. Russia is more likely to turn to Iran and importers such as China and India when it comes to energy politics, rather than the current status quo of OPEC and the IEA.
With rumblings coming from Iran’s international Oil Bourse recently, which is designed to trade oil and oil products in currencies other than the USD, with the USA credit rating being downgraded and thus affecting the USD as a risk free word reserve currency, and with China generally chiding western nations over their excessive levels of debt, Russia and her partners has a very rare opportunity to initiate the roll out of new energy market infrastructure which will better suit consumers and producers. Russia is adept at balancing political, economic and cultural differences, as she borders 14 countries. As the largest holder of gas reserves in the world, and the largest producer of oil, joining OPEC for Russia would be a step back in time.
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Current markets are anything but global or integrated. What if we had a paradigm shift in the way we think and transact when doing business with each other? Balanced global trade can only occur if we have transparent, accessible and efficient markets. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is founding Partner of SBI Markets DMCC, a Dubai-registered commodities trading and advisory company. Barden has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.
