Much Ado About OPEC: Russia Is The True Wildcard, And Just Got Even More Powerful

Tyler Durden's picture

Today the world is transfixed with the dissolution of OPEC courtesy of yet another polarizing response to the most recent set of US MENA policies, with Saudi siding with the US (it has no choice in this: recent violent developments in the MENA region means Saudi Arabia is now even firmer attech to Uncle Sam's armed sleeve), yet the truth is that this is a completely non-event from a pure crude supply/demand perspective. Why? Because the real marginal supplier, in light of OPEC's secular decline in output, has been Russia for a long time. The Globe and Mail's Jeff Rubin explains: "Other than a gratuitous gesture to their concerns, any announced OPEC production increase isn’t going to pump more gasoline into U.S. gas tanks or, for that matter, the tanks of motorists anywhere in the OECD... Khalid al Falih, chief executive officer of state-owned Saudi Aramco, recently warned in April that at the country’s current rate of growth in domestic oil consumption, Saudi Arabia would burn a staggering 8.3 million barrels a day of its own oil by 2028. That is almost its current level of production." In other words, Saudi would promote unilateral actions regardless of the other 6 countries that just isolated the Middle East country, simply to keep its population happy with ever greater bribes, but also due to the expansion of its own economy (as transient as it may be). The real story is here: "Russia, the one country actually capable of producing 10 million barrels a day, isn’t even at the table at the OPEC meeting. And it’s been Russia that has been adding the most to world exports over the better part of the last decade as OPEC exports have faltered." In other words, now that the former cartel is finished, and supply bickering and uncertainty portend extreme crude volatility, Russia's role in the energy output scene, and thus in political in general, is about to become that much more important.

More from The Globe and Mail:

OPEC production remains well below its level prior to the Libyan civil war, and what ever modest increase its kingpin producer, Saudi Arabia, can muster will be more than consumed by that country’s own soaring demand for power from air conditioners in the approaching peak power summer season.

The only thing OECD oil consumers can count on growing in Saudi Arabia and the rest of OPEC is the cartel’s insatiable thirst for its own oil. With the price of gasoline  less than bottled water, Saudi Arabia already burns three million barrels a day with demand claiming a third of its total oil production.

Ridiculously cheap gasoline and even cheaper diesel-fuelled electric power are one of the key tangible benefits the Saudi population, outside, of course the extended royal family, get to benefit from the country’s massive oil wealth. In a period of unprecedented and growing social unrest in the region, those oil subsidies are unlikely to be withdrawn any time soon.

As for why it behooves the US to make a very close friend out of Putin ASAP:

Oil production in Russia, the world’s largest producer, rose to a near post-Soviet high of 10.26 million barrels a day in May. Unlike Saudi Arabia, which has been hard pressed to maintain even a nine million barrel a day production level, Russian production has been north of ten million barrels a day since September 2009.

Prime Minister Vladimir Putin has made it a national priority to maintain Russian oil production at over ten million barrels a day for the next decade. Let’s hope Russian oil giants like OAO Rosneft are up to the task.

And since the global geopolitical-energy axis just got redefined, expect Russian interests in the broader European area to become that much more well bid by the Kremlin, now that it has eliminated Obama's protest.

Slowly, gradually, the transition to the new reserve currency pair, the CNY-RUB, is becoming effectuated and more palpable with every passing day.