OPEC’s strict limits on production along with the seldom mentioned futures market manipulation have successfully elevated the price of oil.  Russia has been a strong supporter of OPEC’s efforts. That support has not included production cuts in Russia, whose market share has grown along with the prices.

According to the Russian Ministry of Energy, in the second quarter of 2009 Russia exported 7.4 million barrels of oil and oil products a day. It was expected that Russia would cut oil supplies after Russian officials vowed to support oil prices in December of 2008. Instead, the Russian oil companies got tax reduction, moreover, the leaders of the segment – Rosneft, Lukoil, TNK-BP - raised oil production by virtue of oil prices, which soared by 54%. (Russia IC)

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Russia has fallen on hard times from the same cause as the rest of the world, but it’s different. Russia’s recent boom was fueled by artificially high, unsustainable oil prices. The high prices are also one of the major causes of the current economic crisis that has erased demand for oil and taken the air out of the speculative bubble that pushed prices so high.  The same falling oil prices have brought Russia’s economic boom to a screeching halt.

President Dmitry Medvedev said Russia may join the Organization of Petroleum Exporting Countries and reduce production to support the oil price.

“We have to defend ourselves,” Medvedev said in the Ural Mountains city of Kurgan today. “This is our revenue base, both from oil and from gas,” he said. “I believe that we mustn’t rule out any options.”

Defensive measures may include “cutting the volume of oil production and participating in existing organizations of suppliers, and in new organizations, if we can reach such an agreement,” Medvedev said in comments broadcast on state television. (Bloomberg)

My take is that Russia is not likely to join OPEC. Membership in the cartel would limit Russia’s autonomy. Both are likely to cut production, but it should not make much difference. Both OPEC and Russia need to learn that oil above $50 a barrel is not sustainable. When the price goes above $50, the profitability of most non-oil businesses declines, bankrupting their customers. It’s far better to charge your customer a bit less, allowing him to stay in business and continue buying form you rather than bankrupt him for a quick short term gain. Forecasting your spending on prices that will ultimately bankrupt your customer will also bankrupt you in the end.

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Russia’s recent high flying economy has been grounded by falling oil prices. Meanwhile back in the middle east, OPEC has been cutting production in an attempt to shore up prices….to no avail. Now Russia has expressed an interest in joining the cartel if natural gas could be included in their market manipulation.

“It might be a step toward Russia joining OPEC if the interests of Russian oil producers and the oil cartel coincide,” said Natalia Milchakova, head of financial analysis at the Otkrytiye financial corporation.

Her opinion is indirectly supported by a statement made by Deputy Prime Minister Igor Sechin about creating a possible oil production reserve in Russia. “The Ministry of Energy is considering creating an oil production reserve which would allow it to work more efficiently with prices on the market,” Sechin said, noting that the reserve must be of a size to “ensure the most effective prices.” However, the deputy prime minister gave no details. (Russia Beyond the Headlines)

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