New Russian oil pipeline recognizes benefits of increased production

Published February 1, 2002

While U.S. politicians debate the pros and cons of natural resource recovery in the Arctic National Wildlife Refuge, Russia and Kazakhstan have opened a new oil pipeline, assuring their roles as major players in the international oil trade.

Russia’s growing influence

The new pipeline, opened in the final week of November 2001, is the first to bring Kazakhstan’s substantial oil reserves to world markets. The 940-mile pipeline was made possible by a Caspian Pipeline Consortium of Russia, Kazakhstan, and various oil companies. It is projected to bring Russia $20 billion in new oil revenues.

By encouraging the recovery of its largest oil reserves, Russia is fast emerging as a nation with considerable leverage over OPEC and world oil prices. Not only is Russia now the world’s largest non-OPEC oil exporter, but the second- and third-ranking non-OPEC exporters, Mexico and Norway, have indicated they will base their production decisions more on Russia’s lead than on the whims of OPEC.

In the past two years, Russian oil production has risen by over 15 percent, and now represents nearly 10 percent of global production.

U.S. benefits from increased production

The potential benefits of substantial non-OPEC oil production were seen in the second half of 2001, as Russia defied OPEC’s call for substantial cuts in world oil production. The more OPEC cut production, the more Russia picked up the slack, ensuring the lowest oil prices seen in years.

“A low oil price is in the interest of everyone except the oil producers,” noted Robert Parker, deputy chairman of Credit Suisse Asset Management.

Parker asserted that low oil prices have kept the world economy from sinking deeper into recession and will likely be the catalyst for a quick recovery. Parker predicted that if Russia continues to thwart OPEC production cuts, the price of oil could further drop to $15 or $16 per barrel.

“I am sure the American and European governments like the idea of $15-$16 a barrel because that will underpin and relate the G7 economies,” said Parker.

Even the New York Times, long critical of increased oil production as an alternative to the Carter-era policies of conservation and alternative fuels, noted the benefits to America accrued through Russia’s increasing oil production.

“The timing could hardly be better,” stated a November 30 New York Times house editorial. “Maintaining current Russian production levels would spare the already sputtering world economy from the added burden of artificially high energy prices.”

Can we rely on current Russian policy?

Russia’s recent inclination to use its oil leverage for the benefit of the U.S. economy is not guaranteed to be permanent. In the weeks and months prior to the September 11 terrorist attacks, Russia and China were publicly speaking of a new alliance to counter the U.S.

With the Russian example demonstrating the positive influence friendly oil production can have on world markets, proponents of natural resource recovery in the Arctic National Wildlife Refuge are likely to push harder for U.S. emulation of Russia’s pro-recovery oil policies.

“There is compelling logic to looking down the road and taking steps now that would prevent us from continually being beholden to unstable parts of the world,” explained Luke Popovich, spokesperson for the Alliance for Energy and Economic Growth.

Americans must not forget how important heightened production is in ensuring a stable and benign energy market, advised Popovich.