The first tanker to sail from Israel with a cargo of Russian crude pumped through the Tipline left Eilat, bound for Asia, in November 2003. According to British energy analyst Simon Henderson, an expert on the Gulf, this event "has the potential to greatly impact the international oil market. Russian oil exports are unconstrained by the quotas of the Organization of Petroleum Exporting Countries (OPEC), and a steady stream of expanded Russian shipments via the Tipline could … lower prices worldwide."
The new route puts Israel firmly on the oil industry map, but more importantly it will strengthen Russia's position in the global energy market, challenging Saudi Arabia as the biggest oil producer. Now, Russia and Saudi Arabia produce around 8 million barrels per day (bpd) each. A confrontation between Saudi-dominated OPEC and Moscow seems inevitable. With oil prices hovering around $30 a barrel, the Russians have little interest in helping OPEC to maintain these prices, and are expected to increase production this year. They are most unlikely to collaborate with OPEC.
The Americans have long wanted to undermine OPEC and US control of Iraq's oil wealth could go far to achieve this. But Russia seems to be making the running right now, and may overtake Saudi production levels within five years. According to Simon Kukes, chief executive officer of Russia's giant Yukos oil company, Russian output could reach 11 million bpd by 2009.
The Tipline connection also cements Israel's relations with Russia, its enemy throughout the years of Cold War, at a time when many oil-consuming states are growing nervous about the security of energy supplies from the Arab world and are seeking ways to reduce their dependence on countries like Saudi Arabia. The Japanese, for instance, get 85% of their oil from the Gulf but want to cut this back to 65%.
The Russians may open another export route to the Far East through Iran's Gulf terminal at Bandar Abbas, which could also reduce Asian demand for Saudi crude. Russia, Iran and India signed an agreement to develop a north-south transportation corridor in September 2000 that would rival the Suez Canal. But this involves investing billions of dollars and years of work, and seems to lie far in the future.
For now, Tipline is the test of Russia's ability to increase the volume of oil it ships to energy-thirsty Asia, where the market is expanding due to China's growing demand for oil to fuel its burgeoning economy. Tipline was built in 1968 to carry oil shipped up the Red Sea from Iran, then still ruled by Shah Mohammad Reza Pahlevi, to Eilat and on to the Mediterranean for transshipment to Europe. At that time, the Suez Canal was still closed following the 1967 war, the Israelis holding the eastern bank and the Egyptians - the western bank. So Tipline saved tankers having to make the long and costly haul around Africa to reach markets in Europe and the US. Israel took what it needed of the Iranian oil for its own consumption.
The 1979 revolution in Iran changed everything. The new regime cut all links with Israel. But the surge in Russian oil exports following the collapse of the Soviet Union in 1991 gave Tipline a new lease on life. By reversing the flow, with Ashkelon instead of Eilat as the loading terminal, the Russians found a new outlet as they drove to develop new markets. Tankers carry the oil from the Black Sea to Ashkelon. They are not big supertankers because Turkey does not allow ships of that size to use the Bosphorus Straits. But big tankers can be used to carry shipments from Eilat.
Tipline can carry up to 55 million tons of oil a year. According to the Russian media, Moscow is expected to pump between 20 million and 30 million tons through Israel this year, as well as provide most of Israel's requirement of 240,000 bpd that formerly came from such diverse sources as Egypt and the North Sea. "Even if the pipeline route was used to its full potential," Simon Henderson says, "Russian oil transported to Eilat would only be enough to fill one Asia-bound oil tanker every two or three days." But boosting the line's capacity would increase exports. Henderson noted that Russian oil shipped through Israel is more attractive to Asian buyers because it eliminates the so-called "Asian premium," the extra $1 per barrel arbitrarily imposed on Asian consumers by Gulf producers. This provides another incentive to reduce their dependence on Arab oil and has caused considerable resentment against the Gulf exporters.
Crown Prince Abdullah bin Abdul-Aziz of Saudi Arabia, the country's de facto ruler since King Fahd fell ill six years ago, made a landmark visit to Moscow in September 2003 hoping to improve relations, largely because of the strains in Riyadh's relations with the US since September 11th, 2001. The Saudis signed a five-year oil and gas cooperation agreement, but the Russians, while cordial enough, did not curtail their campaign to boost oil exports, which are the main driver of Russia's economic boom, or to see prices cut back. The Russians have not forgotten how in 1985 the Saudis used their excess production capacity to flood the market and drive down oil prices to $12 a barrel, which wrecked any hopes of economic revival in the then-Soviet Union and contributed to the collapse of communism soon after.
Yet the Saudis remain increasingly desperate for Russia's help, as the US agenda becomes more belligerent and insists upon speedy political reform that the House of Al-Saud is reluctant to introduce. Just how desperate Riyadh is was evident in January, when the pro-Moscow president of Chechnya, Akhmad Kayrov, said after visiting the Saudi capital that Riyadh had halted all funding for Islamic rebels in his war-torn republic and recognized his government. This can only bolster Al-Qaeda in its campaign inside the kingdom by convincing many Saudis that their government is collaborating with those who seek to crush fellow Moslems fighting the infidel.
Moscow's improving relations with Israel, despite some tensions, underline how Russia's policies in the region are changing. Israeli Prime Minister Ariel Sharon has visited Moscow three times since his election in early 2002. Commercial relations are flourishing with trade running at several billion dollars a year. Russia and Israel are collaborating on programs that have strategic and military implications. Both states are threatened by Islamic extremists, and the Israelis, busy fighting suicide bombers, have been uncritical of Moscow's harsh measures against the Chechen separatists. With Israel as a vital artery for oil exports, the relationship is bound to consolidate, undoubtedly at the Arabs' expense.
