Oil price could rise to $100 a barrel. Russian government has no idea what to do with mega-revenues from sale of 'black gold'

Nezavisimaya Gazeta,
Yevlaviya Samedova and Yevgeniya Obukhova

Oil prices have broken another record, and nobody is surprised anymore. Experts are calmly noting that the current $45 a barrel is the highest price in 21 years of trading. And some experts do not rule out the possibility that the price of a barrel of oil could reach an astronomical $100. In particular, such a view was expressed recently by Deutsche Bank experts. Their prediction, entitled "Confronting the Horror," notes that "oil prices could reach $100 if some incident, disaster, or sabotage leads to a reduction in supplies." Venezuelan President Hugo Chavez also said recently that a price of $100 a barrel is perfectly realistic. And an increase in the price of other goods and services should also be expected in the process. Thus, representatives of a number of major airlines have already announced a possible increase in their ticket prices.
There is nothing strikingly original about the reasons for the latest leap in oil prices. Analysts are talking about increased demand for black gold in the United States and China, the possibility of YUKOS terminating supplies, and also the cessation of oil production in southern Iraq: Around a week ago Baghdad completely stopped exports via the terminal at the Turkish port of Ceyhan because of sabotage against an oil pipeline linked to it in the north of Iraq. In addition, at the beginning of this week it became clear that the monthly average oil price on the world market, as expressed via the OPEC "basket," came to $36.29 a barrel in July, which is a 20-year record. Over the month this figure increased by $1.68 or 4.9 percent. Annualized, the increase in the figure thereby totaled 32.3 percent.
In the view of oil analysts, the increase in prices will continue until the end of the summer, and it might stop only in late September.
Luis Vierma, Venezuelan deputy minister of energy and the mining industry, is more pessimistic and thinks that by the end of 2004 the oil price will stick at around $40 a barrel. The explanation for this, in his view, is that in the winter demand for petroleum products from non-producer countries will only grow.
OPEC's policy with respect to oil prices continues to be inconsistent and ineffective. The oil production quota of the 10 countries belonging to the cartel was increased to 25.5 million barrels a day on 1 July and to 26 million on 1 August. But, as we can see, this did not help at all, proving once again that very little depends on what OPEC does and that there is no direct dependency between oil prices and the level of production. But Purnomo Yusgiantoro, the organization's president, is clearly not losing hope of influencing the rise in prices - a few days ago he said that in September the cartel could adopt a decision to increase oil deliveries by a further 1.5 million barrels a day.
It is astonishing that in the situation that has developed, with oil prices soaring, the Russian cabinet is predicting that they will fall. Last week to the government adopted as a basis for action an Economic Development Ministry prediction whereby the average price of black gold in 2004 will total $30.4 a barrel and a fall in prices to $29 is likely in the second half of the year. Analysts see a partial justification for the government's conservatism, saying that it would not be justified to count on prices remaining consistently high. But nobody today either in Russia or the world believes that prices might fall.
Uralsib company analyst Lev Snykov predicts that the average price of Urals oil in 2004 will end up within the $32-34 a barrel range. The analyst assesses the government's predictions as "somewhat conservative," but fully appropriate. "Prices never stick at such a high level for long," Lev Snykov says. "But they might fall if a number of events should happen." They include, first, a resolution of the YUKOS situation, provided there is no threat of oil production being halted. Second, a great deal depends on whether OPEC, which is already operating at close to capacity, will be able
to really increase production and supplies.
"The government's caution is perfectly justified," Troyka-Dialog chief economist Yevgeniy Gavrilenkov told Nezavisimaya Gazeta. Nobody can predict oil prices, and it is pretty risky to build a budget on more realistic predictions of, for example, $35 a barrel because if prices fall the budget would not be implemented. In addition, the economist adds, the government still has no particular idea where it might effectively spend this money. Right now the stabilization fund is swollen with oil money - at the end of the first half-year it totaled slightly more than $8 billion. The latest pensions top-up totaled an average of 130 rubles.