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Price of oil approaching $100 per barrel

MOSCOW. (RIA Novosti economic commentator Oleg Mityayev) - At the end of the working week, on Friday November 23, the price of American WTI oil was $96-$97 per barrel.

When it reached $99.29 per barrel on November 21, it seemed that this unprecedented psychological barrier - $100 per barrel - would be overcome this week. But operators of oil futures are still capable of surmounting it in the nearest future.

They will be helped by the dropping dollar, on which oil contracts are based. On November 23, the dollar hit a record low of $1.4967 for a Euro. Some analysts predict that it will drop to $1.57 by the end of the first quarter of 2008.

Therefore, constantly growing oil prices is rather a nominal category. This year alone, the dollar lost 13% to the Euro, and since 2002 (when oil prices left the range of $15 to $30 per barrel) the dollar has lost 40%. Thus, the reduction in its rate alone during these years has increased oil prices by $10 to $12.

Needless to say, the stable growth of the world economy and the demand for energy resources has been the main reason of skyrocketing oil prices. The producing countries led by OPEC, an oil cartel, which controls 40% of the world's oil production, are doing all they can to limit the latter. Oil production is steadily growing but at a moderate pace of 1.5%-2% per year. Russia is the second largest oil producer and exporter after the OPEC leader, Saudi Arabia, but is not restricted by any cartel commitments. However, it has sharply reduced its oil production growth rates - to 2.2%-2.4% a year against 6%-11% in the previous five years.

The tense situation in the world oil market is caused by the fact that countries with unstable or unpredictable regimes account for 15% of oil production (and about 30% of oil reserves). These are Iran, Iraq, Nigeria and Venezuela. The risk that they will suddenly discontinue oil supplies is pushing up the prices.

Russia and other oil producers stand to gain from this. Owing to high oil prices, the Russian budget has been in the surplus for several years in a row and its expenditures have increased. The flow of petrodollars has substantially stepped up the consumer demand, which has led to the steadily high economic growth of 5%-7% a year in the last seven years. For the same reason, Russia's gold and currency reserves of $455 billion now rank third in the world after China and Japan.

Moreover, in Russia export tariffs and a severance tax are directly linked to oil prices. If the cost of exported oil is over $27 per barrel, about 90% of the revenues received in excess of this price, are channeled into the Stabilization Fund. In 2004, it was set up "for a rainy day" - to ward off a potential drop in oil prices. But they have continued growing and since 2005, the government has been using some of this money to pay off the foreign debt ahead of time and to finance the Pension Fund. Despite these expenses, a 60% jump in oil prices has increased the fund to $147 billion. This year, the government has channeled an additional sum of $12 billion into the Russian institutions of development (they received $10 billion from the federal budget).

But the flow of petrodollars is not only increasing a country's revenues and the GDP. Expensive oil is pushing up the cost of living in oil-producing countries and leading to inflation. The Russian government and the Central Bank have failed to keep their promise and stop inflation at 8.5% in 2007. (In the lowest estimates, prices have grown by around 11% this year).

Moreover, the influx of petrodollars and the decline of the U.S. currency in the world markets have substantially strengthened the ruble - on November 24, one dollar sold for 24.32 rubles, which is unprecedented since 1999. This has reduced the competitiveness of domestic goods and slowed down the economic growth rates in Russia in the last three months. In the middle of this year, many economists were confident that the GDP would grow by eight percent this year, while now they are predicting seven percent.

Russian oil industry employees are complaining about their lot (although the growth of executive salaries in this sphere has surpassed all reasonable limits). When oil was sold for $9 to$12 per barrel in the late 1990s, they were talking about low incomes and no chances of large-scale investment. Now they are lamenting that the government is taking 70% of their profits, which prevents them from developing new deposits and building new pipelines.

But high export duties have played a positive role. Russian leading oil producing companies have realized that it is better to process oil than sell it abroad. Now Russia is processing 46% of the oil it produces. The ratio for LUKoil is 61%, and for Gazprom Neft 57%.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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