OIL

Russia and Venezuela to fight low oil price

Russia and Venezuela have held meetings to discuss ways of driving global crude oil prices up from their current low levels, which are very damaging to their economies. But will Saudi Arabia go along?

Russia and Venezuela are discussing joint action against low oil prices, Russian Energy Minister Alexander Novak said in Moscow. Venezuelan Foreign Minister Rafael Ramirez was in Moscow for talks as part of a tour of several oil-producing nations, including Algeria, Qatar and Iran, aimed at developing a joint strategy.

Asked if he discussed joint moves to counteract the 30-percent fall in oil prices this year, Novak told reporters: "Yes, there is such an initiative. We discussed this theme and now we are working out those proposals on our side."

Russia and Venezuela, like the other countries on Ramirez' travel itinerary, are heavily dependent on revenues from oil exports for their national budgets. Crude oil prices are set in the context of a global market, so global geopolitical tensions and regional supply or demand surges or drops affect oil prices everywhere.

As a result, any drive to push oil prices back up can succeed only if oil-producing nations as a group agree to cut back aggregate production in the face of weaker demand caused by slower economic growth in China, Europe and other key markets - and by the US surge in shale oil production, which is reducing US demand for oil imports.

If major oil producing countries with large market positions refuse to go along with a global oil supply management strategy, oil prices may stay low for an extended period. And it appears that Saudi Arabia may be playing the spoiler in this game.

Are Saudi Arabia and the US playing a geopolitical game to weaken rivals?

The Saudis are the world's most important "swing producer" - a country with huge oil reserves that can ramp its oil production up or down to balance changes in supply and demand. In normal times, one would expect the Saudis to go along with other oil producing nations in cutting back production to reflect weaker demand, in order to support the oil price. But this time, they aren't doing that.

Some Russian and Venezuelan analysts - among others - believe the US and Saudi Arabia are colluding to drive oil prices down for geopolitical reasons.

Leonid Fedun, co-owner of private Russia-based oil firm Lukoil, cited US President Barack Obama's visit to Riyadh in March.

"Obama travelled to meet the king of Saudi Arabia just after the Crimea events to push him to these actions [to lower the price]," Fedun said last month.

Shale oil production is more expensive and much more energy and resources intensive than conventional oil production - and more environmentally damaging

Perhaps the strongest evidence in this direction comes from US foreign minister John Kerry. After a trip to Saudi Arabia in September, Kerry was asked if past discussions with Riyadh had touched on Russia's need for a global oil price above $100 per barrel to balance its budget.

"They (the Saudis) are very, very well aware of their ability to have an impact on global oil prices," Kerry replied.

Saudi Arabia is in the midst of a proxy war against Iran in Syria and Iraq, with each supporting rival militias, divided roughly along the lines of sectarian affiliation - the Saudis in support of Sunni militias, and the Iranians in support of Shiite militias.

But Saudi Oil minister Ali al Naimi denies a geopolitical drive to get oil prices down is what is going on. After many weeks of silence in the face of spreading conspiracy theories, Naimi finally spoke to the issue on November 12.

"Saudi oil policy... has been subject to a great deal of wild and inaccurate conjecture in recent weeks. We do not seek to politicize oil... for us it's a question of supply and demand, it's purely business," he said.

Some analysts have speculated that one business reason for the Saudis to refuse to cut back their oil production - and therefore to drive oil prices back up - could be a desire on their part to make shale oil production in the US and elsewhere unprofitable.

Plunging Prices for Oil

Shale oil production - especially in the US - has grabbed significant market share from conventional oil production in recent years, but it requires a high oil price to be profitable.

Reuters news agency reported on Tuesday that four different market and diplomatic sources - who asked not to be named - had told Reuters that Saudi officials privately briefed OPEC watchers in New York and Riyadh in September and October.

According to these sources, Nasser al-Dossary, Saudi Arabia's national representative OPEC, and Naimi's deputy, Prince Abdulazis bin Salman, as well as the kingdom's OPEC governor, Mohammed al Madhi, attended at least one of the briefing meetings, and gave the message that Saudi Arabia was prepared to withstand oil prices as low as $70 to $80 per barrel for as long as a year.

The benchmark Brent crude oil price was down to $79 on Tuesday.

nz/hg (Reuters, dpa  dw de