Alexei Miller’s Bluff on $250 Oil

It will remain open for debate what Gazprom’s and Alexei Miller’s true intentions were this week when he announced the company’s perspective that the price of a barrel of crude oil will rise above $250 as soon as next year, but we can see that 1) he is likely dead wrong, and that 2) this is a dramatically irresponsible and reckless sort of announcement for an industry leader to make. Miller’s projection boldly goes far beyond even the most adventurous predictions, such as that of Goldman Sach’s theory of a “super spike” in demand to drive oil to $200 (Goldman, like many others, is heavily hedged into oil). Many other analysts predict maximum short-term prices rising to between $150 and $200, and others are calling it bubble phenomenon, and that prices could soon sink back to $115. Already Gazprom’s $250 oil bluff has received some harsh reactions.

Peter Sutherland, Chairman of BP, took the opportunity to outright reject this “apocalyptic” forecast, remarking that he doesn’t believe we are in for this kind of demand spike. One commentator mentions that as an energy monopoly, Miller has a considerable interest in pushing speculation on oil prices, so “his expectations of crude nearly doubling after already rising nearly 45% this year has to be taken with several billion grains of salt. (…) But $250 just seems crazy – even with strong demand from India and China and tight supplies.” The United Kingdom is on the brink of experiencing a rush of panic buying.When Goldman Sachs presented Arjun Murti’s super spike paper, there was at least abundant statistical analysis to support the argument – and this was the same analyst who correctly predicted in 2005 that oil could receive a super spike to rise to $105.However when Alexei Miller made the $250 prediction, he offered no statistics, no charts, and no basis for the declaration. The Wall Street Journal reports that like most infrequent Gazprom meetings, investors were provided with next to nothing substantive with regard to company financials, business plans, or strategy.I happen to be in the camp of those who think the $250 price prediction, or even the $200 price prediction, is a bluff. Most importantly, we can already see that demand is showing signs of slowing down – even the SUV-loving Americans are changing their consumption habits, driving less, and coming up with other ways to burn less petrol. The U.S. Energy Agency and International Energy Agency are already cutting their forecasts for oil demand.There are of course several factors pushing prices up, including the slipping value of the dollar, OPEC reserves, and rampant speculation by the banks. Our energy correspondent Derek Brower (with whom I jovially disagree with from time to time), has a pretty comprehensive breakdown of the recent price surge that makes a clear argument that we aren’t dealing with a supply issue – so no matter what kind of demand projections we see from India and China, we still have plenty of product (for example, Brazil’s new mega-field).But what is troubling about Miller’s statement is not that he is likely to be proven wrong, but rather the timing with which he chooses to stoke consumers nerves. With the escalating fuel prices, local populations in a number of countries are nearing a state of protest, riots, and panic buying. The Spanish government has had to enact an emergency supply plan in the wake of a crippling trucker’s strike. Public discontent is quickly creating a political crisis – even leading to a potential crackdown on speculators.At a moment in which private oil company executives are at great pains to talk down any energy crisis and guard their high earnings, Alexei Miller’s alarmist call from a monopolist energy giant is a particularly insensitive gesture to international partners and consumers, and an illustration of why Gazprom encounters so much resistance in Europe and elsewhere to be treated as a normal company. It is moments like these which explain Western distrust of Russia as a reliable energy partner.