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Russia seen playing role in tight oil market, higher prices

WASHINGTON—For most of the past decade, Russia, the world's second largest oil producer and exporter, provided the extra supply needed to meet the world's growing thirst for oil. Now its production is flat and the world oil market is drum tight.

The timing of Russia's failure to expand oil production couldn't be worse, and experts differ on why it no longer can be counted upon as a swing producer.

Some say President Vladimir Putin is deliberately keeping production flat to keep prices high and expand Russian influence. Others think its more the result of inefficient state-run oil operations. Either way, Russia's failure to boost production as anticipated is contributing to today's sky-high fuel prices.

Andrei Illarionov, until Dec. 27 a top economic adviser to Putin, thinks his former boss is deliberately refraining from pumping more oil.

"It looks like it's true," Illarionov said.

Once called the second most powerful man in Russia, Illarionov fell out with Putin over Russia's 2004 seizure of private oil companies, especially Yukos, then Russia's largest private oil company.

"Americans as well as other consumers are paying the price for destruction by Russian authorities of the Yukos oil company," Illarionov said in an interview with Knight Ridder. "The destruction of Yukos ... means less oil on the market. It means supply is less and demand is there still. It means higher prices."

Anders Aslun, a former economic adviser to the Russian government and now a senior fellow at the Institute for International Economics in Washington, also believes that Putin is pursuing a strategy to keep global oil supply tight and prices high.

Aslun points to Putin statements in January that Russia is diversifying away from an oil economy.

"For Russia, it's far more important what it is being paid than what it is producing," he said. "Russia doesn't have a strong incentive to invest in oil and gas."

Others don't buy the allegation.

"Illarionov is an extremely bright, disgruntled maverick," said Clifford Kupchan, an energy expert and former State Department official who now heads Europe programs for the Eurasia Group, a risk consultancy.

Kupchan said that while he doubts Putin is limiting production deliberately, Russia's return to a state oil monopoly has had that effect, because that introduced inefficiency into an oil sector that had been flourishing in private hands.

"I would say that the destruction of Yukos, combined with other nonmarket impediments to production growth in Russia, have contributed to high oil prices," Kupchan said. Impediments include high taxes on foreign and private oil companies, limits on foreign investment in natural resources and Soviet-style bureaucratic management.

In 1998, Russia produced about 6.2 million barrels per day of oil. That figure soared 50 percent to 9.2 million barrels by 2004, behind only Saudi Arabia's 10.4 million barrels. Russia exports about two-thirds of its oil production.

Russia's spectacular growth came as world oil demand grew from 74 million barrels per day in 1998 to 82.5 million barrels in 2004, with Russia feeding much of that growing demand.

But since 2004, when Putin took over Yukos, Russian production has been virtually flat, growing by under 3 percent annually, despite vast oil reserves. Russia's proven reserves are generally estimated at between 50 billion and 120 billion barrels.

On Wednesday, the Paris-based International Energy Agency, citing complications from the state takeover of Russia's oil sector, scaled back estimates for additional production this year to 265,000 barrels per day, or growth of 2.8 percent.

The U.S. Energy Information Administration, or EIA, the statistical arm of the U.S. Energy Department, takes a grimmer view. It said Tuesday that it expects Russian production to grow by just 1.5 percent this year and 1.2 percent next year. It blamed the slow output growth on export taxes that discourage maintenance of existing oil fields and development of new ones.

The reduced growth outlook for Russia is just one more factor driving up global oil prices, which appear likely to soon exceed last year's record $70.85 a barrel. OPEC members are pumping nearly flat out and have no more production capacity. The global supply squeeze is further exacerbated by reduced output from Nigeria, where disruption by rebels is taking half a million barrels a day off the market.

Meanwhile, EIA projects world demand growing this year to 86.5 million barrels per day.

While Kupchan, the former Clinton administration diplomat, doesn't believe Russia's takeover of the oil sector was meant to drive up prices, he does believe Putin intended to influence regional and global politics in an oil-hungry world. Putin's temporary cutoff of natural gas exports to Ukraine in January was seen widely as politically motivated punishment to Ukraine, for example.

"In my view, the Russian government's seizing of the commanding heights of the energy sector has put a spring in the step of Russian diplomacy unlike anything I've seen since the collapse of the Soviet Union," said Kupchan. "This is a petro-empowered nation, and that's real important."

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(c) 2006, Knight Ridder/Tribune Information Services.

GRAPHIC (from KRT Graphics, 202-383-6064): 20060413 RUSSIA OIL

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