Rosneft stands firm against oil production cuts.

Photographer: Andrey Rudakov/Bloomberg

Why OPEC Will Keep Oil Flowing

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Igor Sechin, chief executive of Russia's biggest oil company, state-owned Rosneft, said something surprising after a meeting this week in which officials from oil-producing countries failed to agree on the need to cut output. Russia will be fine, he said, even if the oil price falls to $60 or less per barrel. How can that be, if, according to a recent Deutsche Bank estimate, Russia needs a price of about $100 a barrel to balance its budget this year?

The answer works for Russia as well as for a few members of OPEC: Budgets are balanced in national currencies, not in dollars, and any country that has the political leeway to devalue its currency as the oil price falls is not particularly motivated to cut production. Russian President Vladimir Putin explained that much in a recent, unusually frank interview with the official TASS news agency: "Look, before we sold $1 worth of goods and got 32 rubles for it. Now we get 45 rubles for the same $1 worth of goods. Budget revenues have increased, not fallen."

According to data compiled by Bloomberg, the Russian crude oil export duty has fallen from $54 per barrel in January to slightly less than $38 in December. In ruble terms, however, the Russian government has lost nothing: While the Brent oil price is down 25 percent for the year to date, the ruble has lost 30 percent of its value. The government made roughly 1,728 rubles per barrel in January, and it makes 1,775 rubles at the current rate.

An output cut would mean an immediate loss of budget revenue with uncertain consequences for the price, and Russia's oil exports are already down this year compared with 2013.

Oil Prices

Not surprisingly, oil-producing countries that have dared to devalue their currencies this year are the most sanguine about the price drop. Youcef Yousfi, the energy minister of Algeria, said last month that his country was "very tranquil" about the price, even though Algeria supposedly needs oil to cost $113 per barrel to balance its budget. The Algerian dinar is down 9 percent for the year to date.

Bijan Namdar Zanganeh, Iran's oil minister, has vowed not to decrease his country's global oil market share "by a single barrel," even though Iran needs a price of $153 for a balanced budget. The rial is down 7.2 percent against the U.S. dollar so far this year. 

These currency devaluations are not enough to make up for the oil price drop, but the authoritarian governments in Algeria and Iran know they can devalue further if needed, while cutting production will inevitably reduce revenue in the short term.

Nigeria, too, apparently feels it can live with lower oil prices. It has let the naira lose value against the dollar, and the currency is down almost 10 percent this year. 

Then there are oil producers such as Qatar, United Arab Emirates and Saudi Arabia, which have not devalued their currencies but can balance their budgets at relatively low oil prices. They aren't interested in production cuts either.

Only countries that lack this kind of flexibility are more exposed -- and therefore more vocal in calling for an output cut. Ecuador, which uses the U.S. dollar, and Venezuela, where the government controls the currency rate with the usual disastrous consequences, are prepared to do anything to halt the price decline. 

Russia and other countries that have decided to weather the cheap-oil spell by devaluing their currencies will probably compensate their citizens' losses to some degree, but this won't cost that much if most of the goods the poorest people buy are domestically produced. That's how it works in Russia, where Putin's government relies on the lower social classes and public sector employees for political support -- as it waits for low oil prices to batter U.S. shale-oil producers enough to get them to reduce output. Once that happens, the global oversupply will end and prices will creep higher.

That's how the biggest producers in the Organization of the Petroleum Exporting Countries appear to see things, too. "No one should cut and the market will stabilize itself," Saudi Arabia's oil minister, Ali Al-Naimi, said today as OPEC prepared to hold a meeting in Vienna. "Why Saudi Arabia should cut? The U.S. is a big producer too now. Should they cut?"

The ball is now in U.S. oil producers' court. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net