Page 2 of 3 RUSSIA'S
ENERGY DRIVE, Part 2 All power
to Russia By W Joseph Stroupe
other gas producers will be cut
deeply. This kind of unrelenting pressure from the
US and Europe on Russia and on other producers can
easily backfire: it is very likely to move
producers to close ranks prudently and to form a
de facto global energy "axis", such as the West
fears most and is trying to prevent.
The
liberalization of a global gas and/or oil market
involves putting
an
end to the dominance of rigid, bilateral long-term
supply contracts concluded directly between
producers and consumers. Instead, market
liberalization seeks to open the supply for
purchase by almost anyone. Additionally, contracts
are changed from rigid and long-term to liquid and
short-term.
This is accomplished by
setting up spot markets where contracts for oil or
gas ("paper oil" and "paper gas") are traded every
day and where the price is allowed to fluctuate
freely. A highly liquid virtual global pool of oil
or gas is thereby created that nearly all
suppliers sell into and all consumers buy from.
Once the oil or gas enters that virtual
global pool, no producer can control where it goes
or embargo a consumer. The advantages for
consumers in the West are obvious, but for
producers their individual, and for the most part
even their collective, clout with consumers is
diminished.
The US and Europe created such
a system for oil in the aftermath of the 1973-74
Arab oil embargo, and they are pushing to do
similarly now for gas, as LNG (liquefied natural
gas) progressively becomes an important factor
over the next decade.
Gas is still largely
delivered via pipelines, but LNG promises to
change all that. Even before that occurs, though,
the West wishes to liberalize the gas markets to
open up ownership of pipelines, end the dominance
of rigid bilateral long-term supply contracts,
build new pipelines that cut into Russian
dominance and make the gas markets as liquid as
the oil markets. That would cut deeply into the
leverage of producers, especially Russia, and
would tend to put consumers in the driver's seat.
Naturally, Russia and other gas producers oppose
such moves. What are their options?
They
can continue to close ranks to form a global gas
grouping as described above to give themselves de
facto control over any gas market move toward
liberalization - they can thereby scupper, or
remain dominant over, any such move.
Russia, Iran and Algeria alone control
nearly 55% of the world's gas. The three, as well
as a number of other key gas producers, are in
ever deeper energy, political, economic and
military ties that signify an emerging global gas
confederation that includes key consumer states in
the East. They are already being pushed
sufficiently far by the West that they will
certainly exercise that potent option to retain
their hold on the growing clout they enjoy.
However, they will act in stealth,
insidiously deepening their cooperation and
coordination, and avoid grandiose and noisy moves
and announcements.
In the "liberal" US
system, oil and gas transactions are obliged to be
settled in US dollars, thus perpetuating and
funding excessive US global economic and
geopolitical dominance. Many producers and
consumers do not see this as truly balanced access
to the world's energy resources.
Consequently, Russia and its
producer-partners, along with their key consumer
allies in the East, have an entirely different
concept of international energy security - their
vision is one of the dominance of the bilateral
long-term supply contracts concluded privately
between producer/consumer pairs so as to guarantee
(lock up) resources for the consumer while
simultaneously providing producers with a secure,
stable demand for their products.
Producers and consumers thereby become
deeply and intimately mutually dependent - both
economically and politically. The transactions are
not obliged to take place in US dollars.
Market-liberalization principles and techniques
are embraced only on a limited basis as needed,
not to the full extent the United States promotes.
Producers and consumers subscribing to this rival
model share a deep political affinity and common
geopolitical alignment. This model is the bane of
the US and the wider West, which share little if
any political affinity with the bulk of the
world's producers and therefore have increasing
fears that producers could enact an embargo
against them. However, the rising consumer states
in the East do not share that fear because of
their deep political affinity with producers.
Both producers and consumers who subscribe
to the Russian-led model have every potent
economic and energy security-based motivation to
close ranks to ensure that the emerging global gas
market is formed around their model. They will no
doubt do so. They will no doubt also continue
working to reshape the global oil market order
into something they consider "more balanced".
Implications of the emerging model
Analysts and experts writing about the Gas
Exporting Countries Forum (GECF) meeting that took
place on April in Doha, Qatar, have largely missed
the point as respects the importance of
already-unfolding energy developments in both the
gas and oil spheres. This is for the simple reason
that they insist on thinking in black-and-white
terms when it comes to the formation of
organizations and structures.
In their
assessment, either gas producers are moving
eventually to form a formal cartel (or similar
organization) or they are not doing so. And since
no formal announcement of the creation of a cartel
or other formal structure came out of the Doha
meeting, they assume tangible and significant
developments are yet a long way off. They are
wholly mistaken.
They note that any
formalized price-setting mechanism for gas would
be virtually impossible because of the highly
segmented nature of the gas market and the fact
that it is ruled by private bilateral long-term
supply contracts. They note that LNG will not soon
change that fact. Therefore, they reason that the
formation of any gas cartel is extremely
problematic, and unlikely to occur for at least a
decade. However, they mostly fail to realize that
the idea of a "gas OPEC" is nothing more than a
"straw man" in the first place.
Russia is
actively leading the GECF group along the path of
deepening coordination and cooperation, and Russia
is not a promoter of cartels. It refuses to
consider membership in the Organization of
Petroleum Exporting Countries cartel, while
simultaneously crossing OPEC's membership barriers
to court its key members to join its own global
confederation of oil.
Russia plays much
smarter than proponents of cartels do. Russia has
a far better model than that of the formally
declared cartel. It
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