Wednesday, January 7, 2009

A Stronger Russia and a Weaker America = Changes in Energy's Balance of Power

With Russia flexing its energy muscle once again, CARE contacted the leading national expert on Russia and their contril of Europe's oil and gas: Michael Economides, author of From Soviet to Putin and Back and the Color of Oil (An executive summary of the Color of Oil is available on the CARE Website). Once again he did not disappoint us. He has provided us with powerful insight into the energy news behind the news. What is really behind Russia's current battle in the Ukraine? Is it all about the Ukraine? Read on.

Once you read this piece, we encourage you read Professor Economides' other postings here with CARE.

Russia’s Energy Imperialism
If Russia was supposed to shut off natural gas supply to Ukraine in a pricing dispute that is a repeat of what happened three-years ago, why is it that gas was also turned off in Bulgaria, Romania, Turkey, Austria, the Czech Republic and Greece? It does not really matter that gas is re-started soon. Europe’s dependence on a country that is willing and, especially, is able to plunge it in freezing cold and darkness, is the crux of the issue. Russia relishes the role and the Ukraine gas dispute and last year’s Georgia invasion is the modern day manifestation of Russian hegemony in what can be called energy imperialism.

Ukraine, as a transit country for Russian natural gas pipelines transporting gas through its territory to Europe has received gas at a much discounted price -- about $180 per 1,000 cubic meters ($4.90 per million Btu) -- but Russia wanted to increase the price to $250 per 1,000 cubic meters. Ukraine rejected that price and Russia threatened to charge the full rate it charges Europe -- $418 dollars per 1,000 cubic meters ($13.08 per million Btu). By comparison US prices are less than $6 per million Btu.

A giant looms to the east of Europe – occasionally in the shape of a country, other times in the shape of a company, the two often indistinguishable. Russia and Gazprom are poised to dominate the whole of Europe and its Asian neighbors.

OAO Gazprom’s influence has been underestimated and astonishingly not discussed enough. Gazprom has been the flagship of former president Vladimir Putin’s strategy, and the battering ram to break down foreign defenses. The Russian state owns 50.01 percent of the company, and almost all top company executives are Kremlin loyalists. President Dmitri Medvedev was Gazprom’s chairman. He replaced Putin, who became prime minister, thereby replacing Victor Zubkov, who became Gazprom’s chairman. You get the story.

It was in early 2006 that Gazprom cut off gas supplies to Ukraine after it balked at seeing its gas prices rise by a factor of four. Of course, then and today, the issue is not what is happening to Ukraine, which draws a tiny portion of the flowing gas. Cutting Ukraine’s gas flow means massive gas deficits in a freezing Europe.

The Ukrainian affair three years ago was the trumpet heralding the sovereign. Hints of a new Russian empire, this time riding on oil and gas, projected dominance over its neighbors, from East Asia to Europe. Putin was the new Tsar, and most Russians, starved for power after the Soviet collapse, loved him.

Gazprom clearly has a strategy, and it’s to lock up as much gas as possible. In July 2008, Gazprom offered to buy all of Libya’s exportable gas supplies. Russia’s brash move to further control the European energy markets is hard to disguise. Libya is its only credible and neighboring competitor.

Russia has been recently leading the pack to create a new gas cartel, mirroring OPEC for oil. This involves newly minted gas giant Qatar, a western ally but also Iran, perhaps the most energy militant nation, other than Russia.

The situation, repeating itself and likely to re-emerge over and over again is now transparent and reminiscent of the Khrushchev era: world beware – the energy-invigorated Russian bear is at bay. After the Soviet Union’s collapse and its resulting economic calamity, it was up to Putin, through Gazprom, to redefine Russia’s position in the world. Its abundant oil and gas resources are now being put to work to accomplish what nuclear weapons and 50 years of the Cold War were unable to.

Europeans act like helpless sitting ducks. With no energy alternatives to speak of, an assertive Russia breathing on them and flaccid domestic policies influenced greatly by Green parties, European countries may become the victims of the old dictum: be careful what you wish for you might just get it. And this is the lessening of a muscular America leading an assertive western alliance.

Prof. Michael J. Economides, University of Houston and also Editor-in-Chief Energy Tribune Houston, TX

No comments: