Oil prices have begun to do what they do best-swing wildly. After the September 11 terrorist attacks in New York and Washington DC, oil prices fell surprisingly by over $5 to as low as $18 a barrel. But in recent weeks, they have spurted and the benchmark price is now already at around $27 a barrel.

Why did oil prices fall so steeply in the first place when they could have been normally expected to rise following fears of the "West vs Islam" in the wake of 9/11? It was Russia's decision to keep increased supplies going that led to a decline in oil prices in the last quarter of 2001. Why then have oil prices climbed again? The escalating war between the Israelis and the Palestinians, fears of an American attack on Baghdad and Iran's call for an oil boycott of the West are obvious causes. But there are other factors also. Iraq has just announced a 30-day embargo on oil exports as a gesture of solidarity with the embattled Yasser Arafat and Venezuelan refineries are facing major strikes. Venezuela is the US' third largest crude oil supplier and the most important source of gasoline imports. And even though it raves and rants against Saddam Hussein, the US still buys a substantial amount of oil from Iraq under the UN's oil-for-food programme. In 2001, for instance, the US imported close to 0.8 million barrels a day or MBPD (1 MBPD equals 50 million tonnes annually) of crude oil from Iraq which accounted for about 9 per cent of its total imports. America is key to oil since it accounts for close to a fourth of world oil consumption, imports slightly over half its annual crude requirement and picks up around 30 per cent of the crude that is traded internationally.

The erstwhile USSR was the world's largest oil producer but after its dissolution in 1991, the Russian oil industry suffered a setback. From 1996 onwards, however, Russia has made a striking recovery and become the world's second largest oil producer and exporter after Saudi Arabia. Beginning 1999, Russia has increased its oil output by 0.5 MBPD, something no other oil producer has been able to do. In 2001, Russia's oil production was slightly over 7 MBPD, only about 1 MBPD lower than that of Saudi Arabia. The OPEC has been pressing Russia to cut supplies. But Russia has obliged only half-heartedly. The aggressive Russian oil industry that has been privatised is in no mood to listen.

In an incisive article in the March/April 2002 issue of Foreign Affairs, Edward Morse and James Richard discuss the growing contest for dominance between Saudi Arabia and Russia in oil. They conclude that Russia right now holds the upper hand because of the dynamism being shown by its companies even though the desert kingdom is sitting on about one-fifth of the world's reserves and is among the lowest-cost producers. Following September 11, there has been growing bonhomie between Presidents George W. Bush and Vladimir Putin. This might reflect in the growing convergence of interests between the Americans and Russians to develop the oil resources of Central Asia. The duo could take on China which is a major investor in Kazakhstan. China's annual oil output has been stagnating at a little over 3 MBPD and it now buys about 1.5 MBPD from outside. The Sakhalin region of Siberia in Russia's far east is oil-rich and many countries like China and Japan are looking at it as a possible source. Uncharacteristically, but fortunately, India has stolen a march with a massive $1.7 billion investment there. This ONGC venture will probably be among the largest foreign investments in Russia ever. Oil could flow from 2005, resuming Indo-Russian oil links after a long hiatus. This project must succeed.

Saudi Arabia is central to OPEC. It is what is called the "swing" producer in the 11-member cartel. This means that it can bring in or take out substantial amounts of oil quickly from world markets to influence prices. The conservative monarchy is not averse to imposing discipline on its compatriots as evidenced by the way it reacted to Venezuela's breach of its production quota during 1996-98. It was Saudi Arabia that took the lead to institute the $22-28 a barrel price band for OPEC that is now in force; if prices fall below the lower limit, OPEC production would be cut to push up prices and if prices crossed the upper limit output would be increased in order to cut prices.

Saudi Arabia and the US have had a mutually reinforcing relationship that has become closer after the September 11 events, given the heightened insecurity in the ruling monarchy. The Americans have a substantial military presence in the desert kingdom, while the Saudis charge the US (and Europe) about a dollar less for every barrel of oil sold as compared to India and other Asian countries east of Saudi Arabia. Saudi Arabia is also the largest supplier of crude oil to the US. Clearly, as Morse and Richard point out, the trilateral Washington-Moscow-Riyadh relationship is key to the evolution of world oil markets, in which India too has a vital stake.

(The author is with the Congress party. These are his personal views)