According to a report published in the Dallas Morning News, dated December 6, 2001, Russia had agreed on December 5 to cut its crude oil exports by 150,000 barrels a day. The decision was important, as it could pave the way for production cuts by OPEC members and other non-OPEC oil producers, in order to avert a price collapse.

It may be recalled that the OPEC had announced after its November 14 meeting held in Vienna that it would cut crude production by 1.5 million barrels a day, with effect from January 1, 2002, provided that the non-OPEC oil producers such as Russia, Norway and Mexico, also, followed suit by cutting their production jointly by 500,000 barrels a day.

Russia had initially rejected the OPEC’s call on November 15, 2001 and oil price had tumbled to a two-year low of $17.45 a barrel. Ironically, Russia had then offered to cut its production by a symbolic 30,000 barrels a day, which the OPEC had refused to accept.

Perhaps, lower crude prices prevailing in the international market during the last one month had now tempted Russia to announce its decision to cut crude production by as much as 150,000 barrels a day, with effect from January, 2002. Another reason, according to reports published in the US Press, could be that Russia’s exports traditionally declined during the first quarter of the year, due to marked increase in local consumption during the winter season. The decision was, therefore, not likely to hurt its exports, at least, for the time being. However, Russia’s announcement to cut its production by 150,000 barrels a day had failed to have any significant impact on the international oil market. Oil prices had risen modestly in London, after the cut was announced. By the end of trading in New York, however, crude oil was down 16 cents, at $19.49 a barrel.

Executives from 9 Russian oil companies had, also, agreed to the reduction - about 5 per cent of Russia’s daily crude exports - in their meeting held on December 5 with the Russian Prime Minister.

At the same time, Norway and Mexico had also reportedly shown their preparedness to cut 100,000 to 300,000 barrels a day. Thus, apparently, there should be no difficulty now for the OPEC.

Lower prices to hit oil economies: According to a news report published in Dawn, dated December 15, 2001, the US Government had said that, as a result of a drop in world oil demand and prices, OPEC’s oil revenues were likely to plunge 19 percent in 2001 and decline another 14 percent next year.

Latest forecast from the Energy Information Administration (EIA) estimated that the OPEC was going to collect $197 billion only in 2001 from oil exports. The oil revenues were likely to fall next year to $169 billion, according to EIA’s estimates. In 2000, the cartel members were able to collect $241 billion from oil sales.

Several OPEC members had already announced tight budgets, as a result of lower oil prices prevailing during the current year. Earlier this month (December), Saudi Arabia approved its 2002 budget, with a total outlay of nearly $53.9 billion, showing a $12 billion budget deficit.

The kingdom’s spending plan next year banned the creation of permanent state jobs and pay increases. Saudi Arabia was believed to have worked out its 2002 budget on the basis of a forecast price of $17 a barrel, as against $21.50 a barrel being the average price in 2001, according to industry analysts.

Another leading oil producing country, Nigeria, said that it would be unable to meet its 2002 debt servicing obligations, because of the lower crude prices. It had to pay $3.4 billion in debt servicing next year.

While Saudi Arabia’s oil revenues were likely to decline by 15 percent in 2002, to an estimated $49.6 billion, according to EIA’s estimates, Iran (OPEC’s second largest oil producer after Saudi Arabia) was expected to see its oil revenues slip by 20 percent next year to $16.4 billion/. Among the non-OPEC oil producers, Russia’s revenues from its exports of crude oil were expected to decline by about 6 percent in 2002 to $42.3 billion, while Mexico’s oil revenues should decline by 5 percent next year to $10.8 billion, according to EIA’s estimates.

Iraq was the only OPEC member likely to collect more oil revenues next year. Its oil revenues were expected to go up by 7 percent next year to $15.9 billion, as estimated by the EIA. Despite being an OPEC member, Iraq was not subject to OPEC quotas. Instead, its oil exports were administered under a United Nations Programme that allowed the country to use its oil revenues to buy food, medicine and other humanitarian goods. Vulnerability of the top two world oil producers: According to a Business Week cover story, published in its issue of December 3, 2001, both Saudi Arabia and Russia had plenty to lose if crude prices witnessed a nosdedive.

Saudi Arabia produced 8.2 million barrels of oil per day as against 7 million barrels per day by Russia. Exports from Saudi Arabia stood at 7.6 million barrels per day, as against 4.7 million barrels per day from Russia. One area, where Saudi Arabia was definitely in an advantageous position was its production cost. In case of Saudi Arabia, the production cost worked out to $5.40 per barrel, whereas in case of Russia the same worked out to as much as $10.30 per barrel. But, in case of Saudi Arabia, oil exports constituted 90 to 95 percent of the country’s total exports, whereas in case of Russia, oil exports constituted only 25 percent of total exports. This meant that while Saudi Arabia could earn a profit at a much lower price (say, at $10 a barrel), it was much more dependent on the oil revenues to run its economy, as compared with Russia.

In Saudi Arabia, oil exports sustained almost every important Government project. Besides, despite its oil wealth, Saudi Arabia had a 15 percent unemployment rate. If crude prices witnessed a nosedive and dropped to around $10 a barrel, it could be catastrophic for the country’s economy, which could slip into a destabilising recession.

So far as Russia was concerned, higher oil prices in 2000 and most of 2001 had been the main factor behind Russia’s abound after the financial crisis of August 1998.

Russia’s domestic debt was now only 2 percent of its GDP, as against 18 percent before the crisis, which showed the importance of oil for the country’s economy. Although oil exports constituted only 25 percent of Russia’s total exports, every $1 drop in the price of crude cost Russia about 0.3 percent in GDP, $2 billion in export revenues and $1 billion in federal revenues.

Russia could put up with oil prices of $15 a barrel, although the same would pull down its GDP from the present level of 5.5 percent to as low as 1.6 percent. However, a price of $10 a barrel would be disastrous for that country.

That is why a spokesman of Russia’s No.1 oil producing company was reported to have said recently that his country should try to reach a compromise with the OPEC. There was no sense in attempting to grab the market share through a production hike, since Russia was likely to lose in this game because of its higher cost of production.

Future Outlook: In view of the position explained in the preceding paragraphs, there seemed to be a strong possibility that the non-OPEC oil producers might soon by able to reach a compromise with OPEC over production cuts.

A new arrangement may come into effect from January 1, 2002. If the oil producers (including both OPEC and non-OPEC oil producers) were able to jointly cut production by 2 million barrels per day (1.5 million barrels by OPEC and 500,000 barrels by others), with effect from January 1, 2002, that could help push crude price beyond $20 a barrel in the coming winter months.

However, crude prices were not likely to increase beyond the $22.28 a barrel range, due to a weak global demand coupled with a strong inventory position.

Moreover, the oil producers themselves would not allow crude prices to go up to an unreasonable level, in the present circumstances characterized by global recession and the war against terrorism.

However, stability in crude prices could be guaranteed only as long as OPEC was not destablized as a result of the ongoing war against terrorism.