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Foreign Affairs
The Battle for Energy Dominance
By Edward J. Morse and James Richard
Edward L. Morse is Executive Adviser at Hess Energy Trading Company and was Deputy Assistant Secretary of State for International Energy Policy in 1979-81. James Richard is a portfolio manager at Firebird Management, an investment fund active in eastern Europe, Russia, and Central Asia.
Russia vs. Saudi Arabia
The American campaign against terrorism may be grabbing the headlines, but another battle is being waged with perhaps equally significant long-term implications: the contest for energy dominance between the world's two largest oil exporters, Saudi Arabia and Russia. This battle will have fundamental consequences for the world's economy, U.S. energy security, Russia's global role, the future relevance of Saudi Arabia, and the clout of the Organization of Petroleum Exporting Countries (OPEC).
The contest emerged suddenly and unexpectedly. For each of the past two years, Russia has quietly but persistently increased its annual oil output at a rate of nearly half a million barrels a day (mbd) — the largest single increment of increased output of any country in the world. With the world economy and world oil demand stagnating, Saudi Arabia and its OPEC partners therefore opted to reduce their output by 3.5 mbd. Then, on January 1, 2002, OPEC cut output by another 1.5 mbd to stave off a price collapse. Even though Moscow made a symbolic cut in output as well, OPEC has not welcomed Russia's gain at the cartel's expense.
Russia and the Soviet successor states can easily continue to increase oil output at this rate for years to come. The victims of that increase, in all likelihood, will be Saudi Arabia, Kuwait, and other oil producers with state monopoly companies that disallow foreign investment. The only oil not threatened by Russia's rise is the petroleum developed by international companies outside of the key OPEC countries of the Middle East.
The Russian increases have come as a surprise, especially for OPEC. As recently as 1996, oil output from the post-Soviet states amounted to barely 7 mbd. Many people forgot that Moscow's state-owned enterprises once produced more than 12.5 mbd before the Soviet collapse — the largest amount of oil ever produced by a single country, representing one-fifth of global production. That sum is one-third more than Saudi Arabia's peak share at the end of 2000.
After undergoing tremendous transformation since the fall of the Soviet Union, Russia's firms have arrived on the world stage. Although vast room for improvement remains, Russia's oil leaders have largely transcended their robber-baron days. Backed by improved rule of law, they are seeking to protect their new wealth and meet the performance criteria dictated by the financial markets, especially because their firms' shares are now publicly offered. As a result, they are beginning to reinvest capital at a rapid rate. Thanks to them, Moscow is poised to assume a far more significant position in the world petroleum sector than ever before.
Russia's oil revival has coincided with a downturn in the global economy and the first major reduction in the global demand for oil since the early 1980s. The nearly 1 mbd increase in its production over the last two years came at a time when OPEC cut output, thus losing market share, to put a floor under prices. Not surprisingly, Moscow's motivations are being questioned and are often seen as an attempt to . . .