Why are they afraid of expensive oil?

 Why are they afraid of expensive oil?

Russia should think through a smooth exit from the oil production cut deal between OPEC and non-OPEC nations, which will protect the market from a shortage of raw materials, the President of Russian oil major Lukoil Vagit Alekperov said at a Russian Energy Week session.

The management of a large private Russian oil company is afraid of high oil prices: "I am afraid of both low prices and high prices. I personally do not support the price of $60-$70 per barrel, which can lead to the same results as in 2014. Therefore, it was necessary to enter the agreement in time, but also smoothly leave it, so that the market does not become tight," TASS cited Alekperov as saying.

The executive vice-president of NewTech Services, professor of the Gubkin Russian State University of Oil and Gas, Valery Bessel, speaking with Vestnik Kavkaza, explained that expensive oil is not profitable now for Russian companies due to rising taxes. "Vagit Yusufovich was referring to the fact that high oil prices mean high severance tax, which means that companies' profits decline because of rising prices. The current oil price of $50-55 per barrel is satisfactory. Besides, high oil prices will stop the country's innovative development, and we will start to turn into Saudi Arabia, eating our oil and gas resources," he pointed out.

"That's why Vagit Yusufovich is absolutely right. We do not need high oil prices right now, because the current level forces us to work, innovate and revive the economy that we lost in the 1990s. There will be no such prices, of course, unless, there are some kind of global catastrophic events like a new war in the Middle East," Bessel added.

A senior analyst of 'Uralsib Capital', Alexei Kokin, in turn, pointed to other reasons for the problem of high oil prices. "Expensive oil prices stimulate excessive investment in extractive assets. There is a certain cyclicality in the sector: high oil prices cause excessive investment, and low prices - inadequate investment. In theory, that that should not be the case, because oil companies should refrain from investing when there is no certainty, that high prices will last a long time," he noted.

"This causes a situation when prices rise sharply and keep at a high level for a year or two, then this is enough for companies to send a huge amount of money to new projects. And when these new projects reach a certain stage, they can not be frozen, as a result, an excessive amount of oil comes to the market, which leads to a drop in prices. I think that's what Vagit Alekperov was talking about," Alexei Kokin suggested.

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