ROAD TO FAIR OIL PRICES GOES VIA FOREIGN EXCHANGES


25.09.06
MOSCOW. (Dr. Igor Tomberg for RIA Novosti)

The decline of global oil prices to a six-month low is gradually gaining international importance.
They have fallen over 20% from the summer's high of $78 per barrel. This is the biggest drop since the first Gulf War in 1991. Debates about further trends are ongoing: will prices continue falling or will numerous factors lead to a new wave of growth? In any case, it is becoming evident that oil prices have entered a volatile stage during which they will fluctuate broadly.
For Russia, this does not mean just financial losses or gains depending on where prices go. As the heads of the country's economic departments have repeatedly said, it is not so much their level, but rather stability that matters. Today, ensuring Russia's economic security and reducing its dependence on global developments has become a government task.
At all international meetings in recent months, including the G8 summit last July, Russia was mentioned as the only country able to influence the oil supply. So it has every reason to position itself as a leading oil and gas power. Yet, although a leader in oil exports to global markets, it has to trade on terms dictated from outside. Prices on Russia's key export commodity oil are set in London, New York and other international financial centers.
There is traditional fatality in Russia about oil prices being formed "elsewhere" and its inability to influence the process. But having become a leading oil exporter, it has to take the next step and acquire the ability to influence the formulation of oil prices, something the commodities power has so far been unable to do.
This consideration causes much concern among the Russian authorities. Last August, Russian President Vladimir Putin drew the government's attention to the huge and "unfair" price gap between the Russian export blend, Urals, and the North Sea benchmark crude, Brent, which at that time was about $4.5-$6 per barrel. Putin said he believed the price for Urals was "unfair" and proposed to consider ways to bring it up to equal that of Brent. Apart from improving the export crude's quality, he repeatedly spoke of the need to organize an oil exchange in Russia and to list Urals on international exchanges. Obviously, there can be no fair price for Urals unless it is traded on commodities exchanges.
This month has brought the news that the New York Mercantile Exchange will start trading Russian crude later this year. This means that Urals, also known as REBCO, or Russian Export Blend Crude Oil, will be for the first time valued not through a discount on Brent, but by its own trading.
The news was widely commented on in mass media and by the expert community. Most assessments, however, are pessimistic. Indeed, the trade volume is expected to be low, which raises concerns. It envisages real supply from the Russian port of Primorsk. The basis of a contract is 730,000 barrels, i.e. a tanker's load. But analysts say that the market price on such a small amount of oil will not be able to influence the global price of Russian oil. Consequently, this innovation will only be for speculation and will be used by American traders as another financial tool.
This is a justified opinion, because another exchange experiment with Russian oil trade in virtual fuel on the RTS, launched last summer has been moving in a similar direction. Trading in Urals is calculated based on the prices set by Platts. Still, in both cases, we see the beginning of a system for setting prices of Russian oil that is fair and, more importantly, controllable by Russia.
Of course, the real price will be seen only after 30%-50% of the traded amount goes to the exchange. But this requires a huge amount of work to set up an exchange infrastructure, build storage facilities and arrange logistic support for future oil contracts. Finally, oil producers, especially large ones, will have to be convinced (or, possibly, forced) to give up direct contracts with consumers in favor of exchanges. So a third center of Russian oil trading after Moscow and London can only be welcomed.
Still, it is important to bear in mind that Russia will have to do much more to acquire a real influence on global oil prices, including prices for its own oil. This includes the construction of an oil pipeline toward the Pacific, where Russian oil, unlike in Europe, will be traded at a premium, i.e. not cheaper than Brent. Other measures also include better coordination with OPEC and other oil producing countries to ensure a global balance of supply and demand, as well as setting up a clear system of mutual responsibility for energy suppliers and consumers, including in relation to prices.

(Dr. Igor Tomberg, senior research fellow, the Center for Energy Studies, Institute of World Economy and International Relations, the Russian Academy of Sciences, for RIA Novosti.)-0-