VOL. XLV

No 36

9-September-2002

 

The New Geopolitics Of Oil: The US, Saudi Arabia And Russia

 

By Gawdat Bahgat

 

Gawdat Bahgat is Professor of Political Science and Director of the Center for Middle Eastern Studies at Indiana University of Pennsylvania. He is the author of several books and numerous articles on the Gulf region and the Caspian Sea.

 

Russia’s Oil Industry

Russia is a major player on the global oil market because it is the world’s second largest producer and exporter (after Saudi Arabia) and holds 4.6% of the world’s proven reserves. The oil industry represents a major proportion of Russia’s gross national product (GNP) and generates substantial public and private revenues. The Soviet Union was once the world’s largest oil producer. However, since the early 1990s the country’s crude production has experienced dramatic upheavals as the following table shows.

 

Table 1

Soviet Union/Russia Oil Production 1987-2001*

(’000 B/D)

 

Year	Production	Year	Production
1987	11,480	1995	6,288
1988	11,440	1996	6,114
1989	11,190	1997	6,227
1990	10,405	1998	6,169
1991	9,320	1999	6,178
1992	8,038	2000	6,536
1993	7,173	2001	7,056
1994	6,419
_________

* Figures from 1987 to 1991 are for the whole Soviet Union and from 1992 are only for Russia.

Source: British Petroleum, BP Statistical Review of World Energy, London, various issues.

 

The figures show the drastic decline in the country’s oil production from a peak of 11.5mn b/d in 1987 to 6.1mn b/d in 1996. This can be explained by the stagnant economic conditions in Russia during most of the 1990s. This low level of production reflected decreased domestic industrial demand and a decline in drilling and capital investment. The overall Russian economy and particularly oil production have experienced a major shift forward since 2000. The young and pragmatic Vladimir Putin has made economic recovery his main priority and has paid special attention to the energy industry. The Russian economy in the early 2000s is in the best shape it has been in since the breakup of the Soviet Union. Indeed, given Saudi Arabia’s compliance with its OPEC quota and Russia’s unrestricted expansion, Moscow’s oil production exceeded that of Riyadh briefly in early 2002. It is also worth underscoring another major difference between these two oil-producing powers. While Moscow in the early 2000s is producing at full capacity, Riyadh is deliberately keeping a substantial proportion of its production capacity idle in order to prevent the global market from being saturated.

 

Moscow’s Role In Shaping Global Oil Prices

This rising Russian production has had a two-fold impact.

 

A) Domestically, oil prices are having a significant impact on the national economy. Oil exports are a key source of income for Russia, as revenues from exports provide approximately 25% of the national income. Put differently, every $1/B decline in the price of oil is estimated to cut around $1bn from Russia’s federal budget revenue and reduce real GDP growth by 0.5%.[1] It is no wonder that Russia’s economy is increasingly sensitive to global energy price fluctuations.

 

B) Internationally, Moscow’s role in shaping crude prices has expanded. Russia is not a member of OPEC, but has attended many of the organization’s meetings since 1997, and the two sides have worked closely to prevent oil prices from collapsing. This cooperation has become critical in the aftermath of the 11 September terrorist attacks, which contributed to a global economic recession and a decline in world oil demand. After making three production-quota-cuts totaling 3.5mn b/d in 2001, OPEC members were reluctant to further lose market share to non-OPEC members. In December 2001, in an attempt to prevent a collapse of oil prices, non-OPEC producers (including Angola, Mexico, Norway, Oman, and Russia) pledged to cut their production by approximately 500,000 b/d in parallel with a 1.5mn b/d cut from OPEC members.[2] Russia agreed to cut its exports by 150,000 b/d during the first quarter of 2002. Despite heavy lobbying by Russian oil companies to end the cut and to increase exports, Moscow decided in March 2002 to continue its cuts through June 2002. Despite these official commitments, Russian oil companies’ compliance was questionable at best. Indeed, data from the US Department of Energy suggest that Russia’s crude oil exports actually increased in the first half of 2002.[3] Furthermore, in mid-2002 Moscow formally ended its agreement with OPEC to cut production.

 

Four conclusions can be drawn from this expanding Russian role in shaping world oil prices. First, some OPEC members have extremely low marginal extraction costs that give them a pricing advantage relative to other producers. Saudi Arabia can tolerate price decreases better than higher-cost oil producing countries such as Russia. Saudi Arabia and other Middle East producers can make money at $10/B, while production becomes unprofitable for Russian companies at $12/B. Second, Saudi Arabia and other OPEC members are more dependent on oil revenues than Russia. Put differently, the Russian economy is more diversified than most OPEC economies. Accordingly, the latter have more incentives to maintain high prices and will lose more when prices go down. Third, in the early 2000s the Russian oil industry is more privatized than those of the Middle East. Consequently, the decision to increase or decrease production is made by government officials in Saudi Arabia and other OPEC producers, while in Russia the decision is, more or less, negotiated between the oil companies and the government. Finally, Russia, as a top producer and exporter, must participate in discussions and strategies to reduce volatility in global oil market.

 

The United States And Russia Energy Partnership: Russia’s resumption of its leading role as a major oil producing power after the relative stagnation during most of the 1990s has coincided with the political and strategic changes that followed the 11 September terrorist attacks. Developments since September 2001 have deepened the US’ sense of vulnerability to imported oil supplies, particularly from Saudi Arabia. Within this context, an energy partnership between Washington and Moscow was born and slowly is taking shape. This emerging cooperation between the world’s largest oil consumer (US) and the world’s second largest producer and exporter (Russia) is based on two foundations: US oil companies will provide the badly-needed financial resources to Russia’s energy industry and, in return, Moscow has presented itself as an alternative to the volatile Middle East and as a stabilizing oil supplier to the US.

 

With economic recovery at the top of his agenda, President Putin has invited Western oil companies to invest in Russia’s energy sector. A significant step in this direction is the “Prodi Initiative”, named after Romano Prodi, President of the European Commission. Based on this initiative the EU wants to persuade Russia to open up its energy market, with the promise of hard currency as the carrot to induce President Putin to develop an investment climate friendlier to Western oil companies.[4] In line with this policy, several European firms, including giants BP, Royal Dutch/Shell and Eni, have taken a leading role in developing Russia’s oil and gas resources. Similarly, US oil companies have entered the Russian energy market, led by the giant ExxonMobil’s heavy involvement in Sakhalin Island in Russia’s Far East.[5] In addition, the US has shown an increasing interest in exploring oil and gas fields off the Arctic coast of eastern Siberia. In August 2002, US Energy Secretary Spencer Abraham announced that Washington would fund a study to explore four basins in eastern Siberia and estimate their oil and gas reserves.[6] At the same time, Yukos, Russia’s second largest oil company, has started a pilot program to ship oil to the US. In early July 2002, the first direct shipment of Russian oil to the US arrived in Texas.[7] US officials hailed the delivery as a step towards reducing dependence on Middle East oil, while Russian officials praised it as an expansion of their market. Yukos announced its intention to make monthly shipments to the US.[8]

 

Despite this growing enthusiasm to forge an energy partnership between Moscow and Washington the prospect of massive volumes of Russian oil flooding the US market is not realistic. In the early 2000s, Saudi Arabia, along with Canada, Mexico and Venezuela, are major oil suppliers to the US. Russia exports an insignificant volume of crude to the US market. Recent Russian oil shipments should be seen as a sign of good intention and symbolic rather than a breakthrough in the US energy security context. Russia’s oil industry has yet to overcome significant economic, political and logistical obstacles.

 

Challenges To Russian Oil Industry: The deteriorating economic conditions that followed the breakup of the Soviet Union have substantially evaporated since the early 2000s. Given the significant share of the oil and gas industry in Russia’s GNP, special attention has been given to the energy sector. Despite fundamental changes and expansion, Russia’s oil production and exports are still restrained by economic, political and geographical obstacles. These include hesitant reform, lack of foreign investment, inadequate transportation infrastructure and relative shortage of proven reserves (in comparison with the Middle East). The combined impact of these obstacles underscores the proposition that Russia should not be presented as a potential replacement of Saudi Arabia as a major oil supplier to the United States:

 

1) Russia began restructuring its oil sector in 1993 with the initiation of a two-step privatization process. The first phase (1993-95) involved the creation of joint-stock companies operating in an increasingly competitive market.[9] The second phase, which has been ongoing since 1995, involves the auctioning off of large chunks of government shares in these companies.[10] Thus, by the early 2000s the federal government has lost control over the mostly privatized oil sector. Despite the shrinking government shares in Russian oil companies, the two sides are very closely tied together through formal and informal networks. Leading oil companies such as Lukoil and Yukos are increasingly market-oriented but, nevertheless, are still influenced by the Kremlin’s domestic and foreign policy guidelines. Indeed, some analysts contend that since Mr Putin assumed the presidency in January 2000, there has been what amounts to a “creeping re-nationalization” of the Russian oil industry.[11] Furthermore, these hesitant and ambiguous privatization efforts have been hindered by the financial weakness of the country’s oil majors and their lack of market-oriented management particularly in comparison to their Western counterparts.

 

2) Russia’s future level of oil production will be defined by the ability of oil companies to develop oil deposits in the Arctic region, Eastern Siberia and Sakhalin Island. In order to sustain and increase Russia’s oil production from current levels, large amounts of capital are needed to develop new fields and to extend the lives of existing ones. Despite efforts to reform the energy sector, foreign investment in Russia’s oil industry has been limited. After the initial phase of reform, many foreign oil companies decided to wait for the country’s legal and business climate to improve before committing more financial resources. Russia’s unstable tax and legal codes have kept many investors away. The production-sharing agreement (PSA) issue is a case-in-point. The idea behind the PSA was that foreign companies would be protected from changing taxation systems. Russia passed PSA framework legislation in the mid-1990s but failed to introduce amendments to other existing laws, particularly the tax code, that are needed to underpin the PSA regime.[12] Foreign oil companies say a stable PSA regime could unlock tens of billions of dollars of investment in Russia’s oil sector; but by mid-2002 Russia’s parliament had yet to agree on a final form of a national PSA model. In other words, aggressive foreign investment in Russia’s oil industry is still limited by excessive legal and regulatory risks. Finally, both the Russian Government and oil companies are reluctant to permit foreign investors to acquire control and ownership of the country’s strategic energy assets.

 

3) Russia’s oil exports could have been even higher than they are today if they were not restrained by an old and inadequate transportation infrastructure. The country’s pipelines were built mainly during the Soviet era when the targeted markets were in Eastern Europe, and are in a state of disrepair. With a windfall in oil export tariffs in the past several years, Transneft, the state oil transport monopoly, has taken steps to upgrade the country’s pipeline system and expand it to reach new importing regions. In the early 2000s, the bulk of Russian oil is exported via terminals in the Baltic Sea and Black Sea. In the last decade Russia has significantly increased its oil supplies to Europe via the Druzhba pipeline. In 2001 Russia supplied the EU with 17% of its oil imports, preceded only by Norway (21%) and followed by Saudi Arabia (11%).[13]

 

Shipping to the US is costly because of the long distance and the inadequacy of Russia’s infrastructure – primarily deep-water ports. In order to overcome this obstacle and make the shipping of Russian oil to the US cost-effective Lukoil, the largest Russian oil company, has proposed a plan to build a petroleum products terminal in Murmansk on the Barents Sea that would drive transportation costs down enough to export to the US.[14] Since mid-2002, Transneft, Yukos and other Russian oil companies have started negotiating the details of this project with Lukoil.

 

4) Finally, one of the most important restraints on Russia’s rising role in the global oil market and the potential to become a major supplier to the US is the limit of its proven reserves in comparison to Middle Eastern producers, particularly Saudi Arabia. While Russia falls into the category of the top producing and exporting countries, it ranks much lower in that of proven oil reserves. In this respect, Russia ranks 7^th in the world, with a 4.6% share, in contrast to Saudi Arabia (24.9%), Iraq (10.7%), the UAE (9.3%), Kuwait (9.2%), Iran (8.5%), and Venezuela (7.4%).[15] All six are OPEC members, and five are in the Gulf. In addition, Russia’s rate of oil production is exceeding its rate of discovery of new reserves by a significant margin.[16] Put differently, the Russian oil industry faces the depletion of existing oilfields.

 

Two conclusions can be drawn from the current changes in the Russian oil industry and their implications for the US. First, Russia’s surging oil production and exports will add to the pool of world oil supplies over the next decade. This will contribute to diversity of supplies and stability in prices. The US and other oil consumers will benefit by simple virtue of Russia’s rising exports, no matter where they go. Second, The US Government should continue to encourage the political and economic liberalization that has enabled Russian oil exports to rebound. It should resist the temptation to officially promote US imports of Russian oil at the expense of oil from the Middle East or anywhere else. Such a move would raise import costs, distort markets and contribute nothing to supply security.[17] The oil market works best when it is driven more by economic forces than political considerations.

 

Oil From Saudi Arabia

With approximately 264.2bn barrels of proven oil reserves (more than one-fourth of the world total) and up to 1 trillion barrels of ultimately recoverable oil[18], Saudi Arabia is the world’s leading oil producer and exporter. The kingdom holds Ghawar (the world’s largest onshore oilfield) and Safaniya (the world’s largest offshore oilfield). In addition to these massive reserves, the Saudi oil industry enjoys other significant advantages. First, the cost of production is one of the lowest in the world – less than $1.50/B, while the global average cost is about $5.00/B, and even higher in some places. Also Riyadh has a great advantage when it comes to adding new reserves or increasing production capacity. At less than 10 /B,[19] Saudi current production costs and those for developing more production capacity for the future are probably the lowest in the world. Second, Saudi Arabia, and other Gulf states are both very large oil producers and very small oil consumers. Many other large producers, such as the US and Russia, consume either all or big proportion of their production. This gives the kingdom extra weight in global oil trade. Third, the oil industry in the kingdom is nationalized, unlike that in Russia which is moving toward privatization. Since the late 1970s the Saudi Government has had full control and ownership of all oilfields in the country. This means that the Saudi Government is not restrained by private oil companies in drawing its national and international oil policies. Fourth, Saudi Arabia has free access to the sea and its export pipeline infrastructure, linking crude fields with marine export terminals and loading platforms, is extremely well developed. The kingdom’s primary oil export terminals are located on the Gulf and the Red Sea. Fifth, most of the world’s spare production capacity is located in Saudi Arabia. This is an important strategic asset for the kingdom. It means that whenever a sudden interruption of supplies occurs, the kingdom can fill the gap in a very short time. This can be seen as an insurance policy against temporary shortages in world oil supplies.

 

Together all these characteristics of the Saudi oil industry make the kingdom one of the most important players, if not the most important, in the global oil market. Not surprisingly, the US, the world’s largest oil importer, has a strong interest in securing Saudi cooperation in two areas: ensuring the non-interruption of oil supplies from the kingdom and the stability of oil prices. The modern economy is vulnerable to any serious disruption of physical oil supplies. The world economy is also vulnerable to the adverse effects on balances of payments of big and sudden rises in the price of oil.

 

Saudi Arabia As A Reliable Oil Supplier: Saudi Arabia is a key oil supplier to the US, Europe and Japan. In recent years, however, Western Hemisphere producers (Canada, Venezuela and Mexico) have challenged Saudi Arabia’s dominance in the US market. For the last several years Asia has imported more Saudi oil than the US. Still, Riyadh is eager to maintain and even expand its market share in the US for a variety of economic and strategic reasons. Indeed, for more than seven decades Riyadh and Washington have established and maintained a very special relationship to ensure their mutual oil interests.

Unlike the case in other major producers in the Gulf and OPEC, oil exploration and development in Saudi Arabia has been carried out almost entirely by US companies. In the early 1930s, US oil companies were looking for commercial opportunities overseas. Promising oil reservoirs had been discovered in several locations in the Gulf including Iran, Iraq and Bahrain. At that time this newly-discovered hydrocarbon wealth was dominated by European powers, particularly the UK. Meanwhile, indigenous leaders were interested in granting concessions to foreign companies in order to strengthen their rising economic and political power. Under these circumstances, in 1933 King 'Abd al-'Aziz, the founder of modern-day Saudi Arabia, who was suspicious of European intentions, gave the US company, Standard Oil Company of California, an exclusive right to explore for and produce oil in his country. The company later expanded and was re-named Arabian-American Oil Company (Aramco) and established very solid cooperation with the Saudi Government.

 

Unlike other foreign oil companies, Aramco had good relations with the host government and the local population. The bitter dispute in the early 1950s between the Iranian authorities and BP was very different from the smooth cooperation between Aramco and the Saudi Government. In late 1950s the Saudi authorities and Aramco reached an agreement on a modified system of profit-sharing, which introduced the notion of the 50-50 division between the host country and the concessionaire. In 1973, Riyadh took a 25% stake in Aramco. A year later this share was increased to 60%, and in 1980 it was amicably agreed that Aramco should become 100% Saudi-owned, with ownership back-dated to 1976.[20] Despite the Saudi takeover of Aramco, US administrators and technicians, side-by-side with their Saudi counterparts, continued to occupy important positions in the company. Finally, in April 1989, the last American to preside over Aramco, John J Kelberer, handed over power to its first Saudi boss, Ali al-Naimi, who became oil minister several years later.

 

This close cooperation between the two sides, however, was interrupted in 1973 when Saudi Arabia participated in the Arab embargo imposed on the US for its support of Israel. For a long time the idea of using oil as a political weapon by Arab producers against Western powers supporting Israel had been considered. The Saudi leaders were not fully convinced of the validity of mixing oil with politics. Rather, Riyadh preferred to use oil revenues as a “positive weapon” to build up the military and economic strength of the Arab world.[21] Nevertheless, a debate about the potential of the oil weapon continued. Shortly after the outbreak of the Arab-Israeli war in 1973, President Nixon asked Congress to provide $2.2bn in emergency security assistance to replace Israel’s losses in the war.[22] The next day, Saudi Arabia announced a total embargo on oil shipments to the US.[23] In the following months Saudi production dropped sharply, creating circumstances that led to a skyrocketing of oil prices. The embargo was lifted in March 1974 in response to US diplomatic efforts to separate Arab and Israeli troops. This was probably one of the lowest points in relations between Washington and Riyadh. But a few years later, the two sides were able to overcome this crisis and resume their close cooperation.

 

Many lessons were learned from this episode. Indeed, the kingdom has constantly pledged to meet any shortfall “due to any reason, political, military or natural disasters[24]”, out of its spare capacity. This Saudi pledge restored confidence in the market and prevented potential dramatic volatility in prices. Finally, one day after the terrorist attacks on the Pentagon and World Trade Center, Saudi Arabia decided to rush an extra 9mn barrels of oil to the US to ensure ample supplies and to show Saudi support for a “wounded ally.[25]”

 

To sum up, with the important exception of the 1973/74 oil embargo, Saudi Arabia has proven itself as a reliable partner to the US. Not only has Saudi oil continued to supply the US and other global markets with the necessary fuel, but the kingdom has also made its spare capacity available to meet any shortage of supplies due to political or natural disaster. In addition, Riyadh has taken the lead in efforts to maintain prices at reasonable levels.

 

Saudi Arabia As A Force For Price Moderation: In 1960 Saudi Arabia was one of five founders of OPEC.[26] Since then it has been the kingdom’s preference, where possible, to work within the OPEC decision-making structure to keep oil prices at a moderate level. Generally, Riyadh has sought to reconcile its national interests with those of other fellow members and has engaged in consensus-building not only among OPEC members, but also between OPEC and other major oil producers. Despite these efforts to present a coherent and unified front, OPEC has not always spoken with one voice. Traditionally the organization’s market power has been viewed as a trade-off between maximizing price and market share. Within OPEC, countries like Algeria, Nigeria and Indonesia, for instance, contain relatively large populations and relatively small oil reserves. These countries, therefore, have generally tended (with numerous exceptions) to favor a strategy of short-term revenue maximization and have low political/social tolerance for the pain caused by low oil revenues. On the other hand, countries with small populations and large oil reserves like Kuwait, the UAE and Saudi Arabia have tended (also with exceptions) to favor a strategy of long-term revenue maximization and have generally been in stronger positions to weather price declines. Given its huge output, Saudi Arabia has occupied the driver’s seat in determining OPEC production and pricing policies as the following table illustrates.

 

Table 2

Saudi Oil Production And Share Of Total OPEC (1980-2001)

 

Year	Saudi Production	OPEC Production	Saudi % of OPEC
1980	9,990	27,445	36.40
1981	9,985	23,380	42.70
1982	6,695	19,930	33.59
1983	5,225	18,425	28.35
1984	4,760	18,470	25.77
1985	3,565	17,215	20.70
1986	5,150	19,555	26.33
1987	4,600	19,345	23.77
1988	5,720	21,605	26.47
1989	5,635	23,215	24.27
1990	7,105	25,135	28.26
1991	8,820	24,692	35.72
1992	9,098	26,074	34.89
1993	8,962	26,875	33.34
1994	8,873	27,204	32.61
1995	8,890	27,466	32.36
1996	9,036	28,252	31.98
1997	9,213	29,553	31.17
1998	9,219	30,821	29.91
1999	8,549	29,368	29.10
2000	9,115	30,901	29.49
2001	8,768	30,181	29.05
____________

* Saudi and OPEC productions are in thousand barrels per day.

Source: British Petroleum, BP Statistical Review of World Energy, London, Various Issues.

 

The figures show not only Saudi Arabia’s huge production both in absolute terms and as a percentage of total OPEC output, but equally important, that its share of total OPEC production reached its highest levels in 1981 and 1991. In other words, at the beginning of the Iran-Iraq war and the Gulf war Riyadh raised its production to make up for the shortage of supplies caused by regional conflicts. This deliberate policy of maintaining prices at a moderate level and preventing excessively high prices serves the Saudi national interests, particularly in the medium and long terms. Very high oil prices could lead to the development of alternative or competing energy sources, which could undermine the importance of petroleum. In this respect, it is known that when petroleum loses its competitive edge, it will be difficult to recover it, even if prices subsequently decline. Another disadvantage of high prices is the increase in oil exploration and development activity in non-OPEC countries, which in turn leads to an increase in supply and exerts downward pressures on prices. Finally, as Saudi Oil Minister Ali al-Naimi emphasizes, “We live in one world whose geographical and economic blocks are interrelated and affect each other. Excessively high prices could have a negative impact on the world economy, which in turn weakens demand in the long run and causes producing countries to lose their credibility.[27]”

 

Thus, at least partly due to the Saudi efforts to keep oil prices at a moderate level, the price range from the mid-1980s until the second half of the 1990s was $15-$20/B – a level with which both consumers and producers seemed happy enough, despite some considerable volatility around the mean. Most notably, the 1990 Iraqi invasion of Kuwait caused a temporary and short-lived shortage of supplies that sparked panic in the global markets and pushed prices up. In a very short time, Saudi Arabia increased its production to make up for the Iraqi and Kuwaiti supplies and the prices fell to their average prior to the crisis. In response to increasing volatility in prices since the late 1990s, OPEC has sought since March 2000 to keep prices at certain range by adopting a “price band”. According to the price band mechanism, if OPEC basket prices[28] above $28/B or below $22/Bl for a pre-determined number of days, then production adjustments are made. These were very successful in keeping the basket price above the lower end of its target range for most of 2001. The global recession and the terrorist attacks of 11 September have changed OPEC’s pricing policy. In January 2002 Saudi Arabia’s oil minister declared that the price band had been suspended, as stability in the market was more important than the OPEC price target.[29] Since mid-2002 the basket price has been within the range of the band.

 

To sum up, the Saudi policy of keeping oil prices at a moderate level coincides with US economic interests. On the one side, keeping world economies dependent on oil supplies at reasonable prices will provide Riyadh with steady revenues, and ensure continuity and stability for its economic and political development. On the other side, a moderate level of oil prices benefits the US economy. It acts similar to a tax cut, increasing consumer disposable income. This allows for a looser monetary policy, and hence lower interest rates with lower inflation and stronger economic growth than would otherwise be the case. Conversely, sharply higher oil prices were a major cause of recessions in the US and other Western economies during recent decades, including the first in the 2000s.

 

Concluding Remarks: Terrorism And Oil Security

The 11 September terrorist attacks have had a significant strategic impact on US relations with Russia and Saudi Arabia. While Washington and Moscow have found themselves together fighting a common enemy – militant Islam, Washington and Riyadh have had serious disagreements. Officials in the Bush administration keep expressing their satisfaction with the cooperation they are receiving from Saudi Arabia in the war on terrorism. However, the fact that 15 of the 19 hijackers were Saudi nationals and that accusations and denials that Saudi private money had been used to finance terrorist organizations have raised doubts regarding the seven-decade-old informal alliance between Saudi Arabia and the US. The lawsuit filed by relatives of people who were killed in the 11 September attacks against Saudi banks and charities and members of the royal family in August 2002 illustrates this climate of mistrust that has characterized the relations between the two nations lately.

 

In response, the Bush administration has intensified its efforts to reduce US dependence on Middle East oil and secure supplies from other regions. Given Moscow’s expanding oil production and exports, as well as its increasingly warmer relations with Washington, Russia has become an important candidate to meet this challenge. This notion, however, does not take into consideration two fundamental facts. First, despite Russia’s rising oil production, the bulk of incremental world demand will be met by those countries with the highest reserves. Gulf oil production capacity is projected to increase from 31% of the world total in the early 2002 to 36% by 2020.[30] As such, Riyadh will continue to have a significant bearing on future capacity additions and the management of the world’s petroleum supplies and prices. Moscow simply does not have the oil reserves or the production capacity to replace Riyadh. Second, for a long time energy security was narrowly defined to mean reducing dependence on imported oil. The relations between producers and consumers were presented and seen in zero-sum terms, with the interests of one side being achieved at the expense of the other side with very little, if any, as mutual benefits for both. In today’s market environment, however, energy security is increasingly defined as a shared issue between producers and consumers. In the early 2000s, the global oil market is well integrated, with multiple producers, consumers and national and international oil companies. A main characteristic of this growing market is interdependence. While Russian oil production is expanding, this development is not necessarily at the expense of Saudi Arabia or other producers. Rather, Russian production will contribute to the security of oil supplies and stability of prices.