For large energy-consuming countries like India, who have seen their oil import bills soar every time the Organisation of Petroleum Exporting Countries (OPEC) decides to put domestic revenue concerns before market interest, the announcement of the May 24 US-Russia energy cooperation pact may spell the beginning of the end of OPEC’s reign. For some time now, speculation has been rife, both in the media and in energy markets about the battle for leadership between the current frontrunner, Saudi Arabia, and Russia. Prior to 1992 Moscow was the largest crude oil producer, with 11 million barrels per day (mbd) output, which however dipped to 6 mbd till 1998. Now with Washington promising to invest huge sums in the Russian energy sector, both countries have pledged to end oil price volatility and ensure greater predictability in supplies. More importantly, the pact may place Moscow in a position that would give OPEC in general, and the Saudis in particular, a run for their money.

The agreement itself raised more than a few brows, given that Washington and Moscow have for some time now been competing for influence in the former Soviet Union states of Central Asia. In fact, this rivalry was instrumental in preventing these states from capitalising on their energy resources by preventing Western consortiums access to export routes from the land-locked region. Now one hears of Gazprom - the largest Russian energy firm - in talks with American companies for a stake in the regional projects (Baku-Tbilisi-Ceyhan pipeline project and the Turkmenistan-Afghanistan-Pakistan pipeline). How has this come about?

OPEC has, since its inception in the 1970s, been indulging in production manipulations with an eye on achieving optimum prices to bankroll member-states’ economies, which are all dependent on oil revenues, sometimes even threatening to use oil as a weapon for political gains. Consequently, the US and its allies have been attempting to find alternatives to Gulf oil for some time now, though without much success, as with two-thirds of low cost oil reserves located in the region, the cartel has managed to manipulate the market to suit their pockets. Consequently, barring a few periods, OPEC has managed to keep prices within their preferred bandwidth of $22-$28 per barrel. But now, with Russia pumping almost as much oil as the Saudis at 7.29 mbd, the US may have found a way to keep OPEC in line.

For the Russians, expanding production would also allow them to alleviate their current economic predicament. Oil exports (currently at 4.76 mbd) constitute 40 per cent of total exports and 13 percent of gross domestic production, and any increase in output would be a bonus. As the January 2002 OPEC-led oil production cuts showed, Moscow was a reluctant participant and there were rumours that while Russia did cut output, it was driven more by weather considerations than by feelings of solidarity!

There is no doubt that any rise in non-OPEC production would be shortlived as the majority of the world’s spare oil capacity lies in the OPEC Gulf states as the non-OPEC producers maintain spare production capacity of only 500,000 b/d, compared to OPEC’s 5 mbd. But with moribund economies, completely dependent on oil revenues, it is soubtful whether the Gulf countries would be able to sustain production cuts at low prices, even for a short period. ALready, most OPEC countries are producing at optimum levels and would have to open up their oil sectors to foreign (mainly US) participation to increase output. But with anti-West emotions at an all time high in the region, and a political elite that is against sharing their wealth with the IOCs, this would mean incurring the wrath of their people, which the rulers can ill afford.

Therefore, when news of the Kashagan fields in Kazakhstan showing recoverable reserves of 7-9 billion barrels of oil, Washington’s renewed interest in the Caspian Basin came as no surprise. The region has of late seen the infusion of more than 4,000 US troops - ostensibly to train anti-insurgency troops in the fight afainst Islamic terrorists - and more than $20 billion in US investment, with Kazakhstan being the biggest recipient. The international oil companies (IOCs) have also revved up thir commitment to the region, with British Petroleum (BP) alone planning to induct up to $12 billion over the next eight years. The US hoped that with much-needed investment and technology flowing in, Russia and the energy-rich Central Asian states will give the US the leverage to thumb their noses at the troublesome Gulf poducers.

The Saudis realise their predicament only too well - after all till now, they have been the greatest advocates of a balanced market, often pressuring more militant fellow producers to keep prices at reasonable levels or run the risk of having their share squeezed by increasingly bold non-OPEC rivals. But with bloated welfare states to nourish and an increasingly restive population, the Gulf rulers are forced to extract every riyal they can get - now. For example, the Saudis alone need to sell oil at around $26.50 per barrel at a production rate of 7.7 mbd so as to afford their 2002 budgetary expenditure of $59 billion. But, according to energy analysts, a price of $25 per barrel over a six-month period would cause a half point cut in a developing country’s GDP growth, while the Center for Global Energy Studies forecasts that if prices are sustained at $25 per barrel through 2010, consumption will wind up being half what it would have been at $20 per barrel.

Today, OPEC can only blame itself for the fall in its market share from 55 per cent in 1973 to about 39 per cent curently. Therefore, despite sitting on huge reserves, the Gulf OPEC members may find themselves in an increasingly precarious position in the days to come as more non-OPEC projects in hitherto high production cost regions, such as the Atlantic Basin, West Africa and Caspian Basin region, come onstream. Worse, if pressures increase, countries like Saudi Arabia may break rank, allow foreign participation in their upstream sectors to increase production and take back the initiative at OPEC’s cost.