RUSSIA - Effects Of Global Warming & Oversupply

APS Energy Group (AEG) says if the mild winters and the heat waves during the warmer months prove to be direct effects of global warming, the latter would have serious implications for the oil market. In that case, world demand for fuel oil and natural gas for electricity to feed air conditioners would continue to be strong in the warm seasons during the years ahead. The pattern of oil demand seasonality would change, with winters to be replaced by the warmer months as periods of high demand. However, AEG points to scientists who still doubt the global warming theory and its severity. Some scientists expect the cold and snow to return in the North-Western Hemisphere during the winter months.

Iraq is a key factor influencing spot trades, with emphasis on the Mediterranean market which has grown to about 4m b/d. A major part of Urals exports from the Black Sea is being traded on the Mediterranean market, where sour crudes form the majority of grades changing hands. But this market is still influenced by Dated Brent, although the relative strength of Dubai, Urals, Iraq's Kirkuk/Basrah Light deliveries and other sour crudes reflect demand for fuel oil.

Iraq is the weak link in OPEC's price defence efforts. But on Aug. 17 Luis Giusti, president of Petroleos de Venezuela, told the Venezuelan newspaper 'El Universal' that "reality indicates that only 1m b/d had been cut" from OPEC's total pledged output reductions of 3.5m b/d. He said Venezuela had abided by its promise to cut 525,000 b/d and had no plans to withdraw from the agreed OPEC/IPEC programme of output reductions. Iraq's exports have risen to almost 2m b/d. On Aug. 16, Iraq's Oil Minister Amer Al Rashid said Iraqi exports will rise to 2.7m b/d once UN-approved spare parts arrive for repairing damaged oil infrastructure. In July he said exports would reach 2.3m b/d within the rest of 1998. (Iraq is entitled to export $5.2 bn worth of crude oils every six months, under its February 1998 oil-for-aid deal with the UN).

Anticipating strong demand for sour crudes in the coming months, Saudi Aramco has cut September deliveries of Arabian Heavy and Medium crudes by about 400,000 b/d and raised their prices for the coming month. Kuwait's KPC has

followed suit by raising the September price of its heavy/sour crude by 50 cents/barrel to a 60 cents discount to the average Oman/Dubai spot price.

Effects On Russian Economy: The fall in world oil prices since October 1997 has had devastating effects on Russia's economy, which depends heavily on the export of energy and raw materials. It is estimated that revenue losses for the oil sector in 1998 would range from $7 bn to more than $7.5 bn.

The pressures on the federal state were so heavy that on Aug. 17 the Moscow government was compelled to allow the rouble to float down against the US dollar, to freeze and forcibly restructure the domestic debt market, and to impose a 90-day moratorium on the repayment of some foreign commercial debts. These measures were intended to buy the government time to grapple with the worst economic crisis Russia had suffered since the collapse of the Soviet Union.

The rouble fell immediately to 6.88 Rbs to the dollar. Shops raised the prices of goods by up to 20%. Currency exchange points were only prepared to sell the dollar at 9 Rbs. One Western analyst said on Aug. 18: "The market capitalisation of Russia is now only three times that of Yahoo" (the US Internet provider)...which is half the size of (US DIY) Home Depot". Russian economist Pavel Teplukhin said: "We are at the beginning, not the end, of a very serious crisis. I do not know how anyone can stop the situation from getting worse".

In the opposition, the Communist Party was incensed that the government's measure was to hit the poor far worse than the wealthy and, dominating the Duma together with the nationalists, demanded President Yeltsin's resignation. Communist leader Gennady Zyuganov warned foreign investors that they faced a nationalist backlash if they kept supporting Yeltsin's regime. He said: "I want to warn investors: if you keep giving money to a drinking, degraded and immoral person, you will have to share responsibility with him" (see who's who in Part 4).

However, the oil companies and gas monopoly Gazprom warmly welcomed the de facto devaluation of the rouble. They now found it earlier to pay their tax debts to the government. The government's move changed at a stroke their balance sheets as their dollar-denominated oil and gas exports became profitable. The new trend had been visible in share price movements a few days earlier. As signs that there would be a devaluation became clearer by Aug. 14, LUKoil's share price surged ahead, along with that of Surgutneftegaz and other oil majors. While their export revenues are in US dollars, about 95% of the oil companies' operating costs are in roubles. Oil and gas exports play a critical role in Russia's economy as about 30% of the federal government's hard currency revenues come from oil and gas sales to non-Russian markets.