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August 8, 2007

Oil-fuelled boom continues
Russia's lucky streak continues. The price of oil, the country's main export item and its chief source of budget revenues, has once again soared to record levels.

On July 31, the price of a barrel of oil gained $1.38, closing at $78.21 on the New York Mercantile Exchange (NYMEX). This is the highest it has closed on the NYMEX since the exchange began trading oil in 1983 and is close to its all-time record of $78.40 per barrel reached on July 14, 2006.

The rise in oil prices will allow the Russian government to meet this year's budget requirements as early as this August. However, a country cannot live only on revenues from non-renewable resources.

Oil experts explain the surge in prices by American oil refineries' growing demand for crude. Many of them were closed until quite recently; some for scheduled maintenance work, others because of damage suffered from hurricanes in the Gulf of Mexico. Only now have they started to operate at full capacity and therefore, to buy more oil.

This is all true, but there is a more fundamental reason for the steady rise in oil prices. At present, all oil produced in the world is bought up almost immediately by consumers, who push up the price. In these conditions, buyers can only hope that the Organization of Petroleum Exporting Countries (OPEC), which controls over a third of global oil supplies, will increase supplies. OPEC members, in particular Saudi Arabia, which is the cartel's unofficial leader, have substantial unused oil-production capacities. However, judging by OPEC's actions, they see no reason to boost oil output.

Russia, together with Saudi Arabia, is the world's leader in oil production. Unlike the latter, however, it is not an OPEC member and is therefore not bound by the cartel's restrictions, so it can derive the maximum benefit from the favorable market. Though Russia has not commissioned any new oil fields in the past 15 years, Russian oil companies have managed to increase oil production and, consequently, oil exports by 4% this year. According to estimates, Russia receives $550 million a day from oil exports. The bulk of oil revenues goes to the state budget, accounting for over 60% of the funds.

The Economic Development and Trade Ministry was pleased to announce that last month the average price of Russia's Urals blend of crude was $74.24 per barrel, surpassing its previous high of $69.10 in July 2006. Russian government officials hope that it will stay high throughout the month of August. If it does, they will not have to worry about the next few months: the target for the amount of petrodollars in the treasury will have been met.

Meanwhile, it would be a big mistake to rely only on the huge profits generated by the export of hydrocarbons. According to most forecasts, oil prices will drop from their present record levels, but stay fairly high ($50-$60 per barrel) over the next two decades. By the same forecasts, proven oil reserves may be fully exhausted by the middle of this century.

Therefore, we can only welcome the Russian economics ministry's plans to switch from a raw materials-based economy to high technology. According to these plans, the high-tech sector of the Russian economy should be twice as large as the raw materials sector by 2020 and account for a larger portion of Russia's export revenues. This, however, is the ministry's most optimistic scenario.

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

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