Russia poised to become oil king

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The terrorist attack in the Saudi Arabian city of Khobar over the weekend may have tremendous implications for international petroleum markets, Western security and Russia's standing in the world.

With Saudi Arabia's security risk on the rise and fears that violence will increase there, the world has little choice but to turn to Russia as a source of secure – and reasonably priced – petroleum exports.

Russia is poised to assume leadership of crude-oil export markets, the implications of which also could significantly affect Russia's domestic political and economic order.

When President Bush and Russian President Vladimir Putin meet in Normandy, France, later this week for D-Day commemorations, it is unlikely they will spend much time discussing the past. More likely both will be keen to discuss the present and future of international petroleum production and export.

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For Bush, the present is marred with problems: International terrorism has come to oil-export giant Saudi Arabia, a barrel of oil hovers around $40, at home a gallon of gasoline costs up to $2.50 and weapons of minor destruction limit the prospect of Iraqi oil significantly impacting international oil markets any time soon.

The future does not look very promising either for Bush. Energy-hungry China and India also are actively interested in sourcing new and secure energy export markets.

For Putin the present is very secure – too secure for some, who view the Russian president as a growing autocrat. Putin has good reason to feel confident. Since 1999, Russia's petroleum production has increased 48 percent, primarily on the back of flows from new wells. Producing 9 million barrels of oil a day, Russia is the world's largest producer.

Due to almost unprecedented global demand, the Kremlin's coffers receive an additional $1.5 billion per month, and a number of petroleum-market experts claim high prices last year made up about 3 percent of Russia's 7.3 percent gross domestic product growth. Experts also estimate that each dollar above the yearly average of $22 per barrel adds 0.25 percent to GDP.

Putin also is looking to the future. During his address to the nation last week, he called upon his oil ministers to finalize plans to increase output to 11 million barrels a day by 2009. Russia's expected export increase, in conjunction with other world suppliers, is hoped to lower the cost of crude as early as 2006.

Bush and Putin also may discuss what the future holds if Saudi Arabia becomes a target of larger and increased terrorist attacks. Without Saudi exports of crude, OPEC would lose its influential powerbroker.

As the largest producer in the world, Russia might rethink its position concerning membership in the international petroleum cartel if Saudi exports were to face long-term risk.

Russia, with OPEC observer status, has flirted with the idea of joining OPEC in the past. However, regaining the market share of international exports held by the Soviet Union has been the primary goal. That goal is close to becoming a reality.

Additionally, Russia has had little incentive to work closely with OPEC when oil prices are high. However, with future supplies in doubt and prices uncertain, the Kremlin has reason to reconsider its position. Being the world's new energy kingpin most certainly appeals to Putin – intent on returning Russia to its former great power status.

The politics of international oil production and exports also significantly impact Russia's domestic oil patch. International energy demand provides the Kremlin with every possible incentive to rein in privately owned domestic oil companies created by Russia's very chaotic and very corrupt economic order of the 1990s.

Last week Putin said, "The government must base its decisions on the interests of the state as a whole and not on those of individual companies." Russia's oil giants – LUKoil, Yukos and Sibneft – are acutely aware that Putin means business.

What has been called a political witch hunt against Russia's richest individual, former Yukos chief executive officer Mikhail Khordorkovsky, is in fact the Kremlin's reordering of the country's vast and very lucrative national-resource base to benefit the state. Rumors floating around Moscow suggest a considerable chunk of Yukos will be sold to another large domestic and Kremlin-friendly energy producer.

LUKoil, Russia's largest petroleum firm, already understands Putin's message. The company is more than willing to pay more taxes and work as a loyal energy foreign-policy conduit for the Kremlin.

Sibneft, Russia's third-ranked oil producer and owned by oligarch-English football enthusiast Roman Abramovich, also caught the Kremlin's attention. With investigations of Sibneft and Abramovich mushrooming, it appears only a matter of time before Sibneft will be under the Kremlin's heel as well.

Putin is on top of the world. He is in the process of creating a Kremlin oil cartel at home and just might land himself the prize of sitting at the very center of international oil politics.

Peter Lavelle is an independent Moscow-based analyst and the author of an electronic newsletter on Russia, Untimely Thoughts.