http://www.politico.com/magazine/story/2014/03/vladimir-putin-energy-war-104891.html#.UzGULPJOXIU
Forget Glasnost, Mikhail Gorbachev and the arms race. What really broke the Soviet Union was the collapse of oil prices in the late 1980s. The late economist Yegor Gaidar, one of Boris Yeltsin’s prime ministers, wrote in 2007 that the empire’s fall could be traced back to Sept. 13, 1985, when Saudi Arabia, fed up with holding back supply to prop up prices, opened the spigots in a quest to recover lost market share. That day, he argued convincingly, was the beginning of the end.
The USSR, pumping almost 12 million barrels a day, was the world’s largest producer at the time. Riyadh’s change in policy caused a price shock: Oil fell from about $25 a barrel to less than $10 in the months that followed, and stayed low for the rest of the decade, costing the Soviet economy $20 billion a year in lost revenue—“money without which the country simply could not survive, ” Gaidar wrote.
Russia is the world’s biggest oil producer again now (though Saudi Arabia is the biggest exporter) but its economy still depends heavily on selling energy. Oil and gas exports account for about half of Russia’s budget and about 30 percent of its GDP. This makes it vulnerable. If the West wanted to punish President Vladimir Putin for his land grab in Crimea, runs the argument, it should target the energy revenues that keep his petro-economy afloat.
In the short term, though, the West can’t devastate Russia’s energy sector—in which Western companies such as ExxonMobil, Shell, Total, Eni, Statoil, BP and GE are all heavily invested—without damaging itself. A longer-term option could involve efforts to deflate real oil and gas prices gradually, either by reducing growth in energy consumption or boosting supply. But that has made strategic and economic sense for decades and not much has changed. It’s hard to see Russia’s annexation of Crimea being the trigger for a fundamental shift in the global energy business.
One proposal is for the United States to sell off some its Strategic Petroleum Reserve (SPR) to cause an immediate fall in crude prices. At the last count, the SPR held 696 million barrels of oil in depots along the Gulf of Mexico. Energy expert Philip Verleger calculates that the United States could release between 500,000 to 750,000 barrels per day from it for two years without breaching international obligations to keep 90 days’ worth of equivalent oil imports in storage. Rising U.S. production has undermined the need for the SPR to hold so much oil. Sell off the excess, Verlager argues, and global oil prices would fall by $10-12 a barrel, costing Russia $40 billion in lost revenue and wiping 4 percent off its GDP.
Would the United States do it? It recently agreed to sell 5 million barrels from the SPR, ostensibly for technical reasons, though the announcement was seen as a message to the Kremlin. One analyst quoted by Platts, an oil-price reporting agency, likened the move to “cleaning the shotgun on the porch when your daughter has a date coming over.”
But a bigger SPR release is risky. The stored oil is there for emergencies. The last release, in 2011, followed the collapse of exports from Libya during its civil war, and probably prevented a price spike. Selling some SPR oil now would leave the market wondering when the United States would next wield this energy weapon, and against which oily foe. The market’s reaction is unpredictable, too. Buyers might just hoard the extra oil, thinking the SPR had lost some capacity to handle a genuine supply interruption. Or China might use a dip in prices to beef up its own strategic reserve, which holds more than 160 million barrels now but will expand to 500 million by 2020.
And, really, how much of a threat to Russia is a $12-a-barrel price drop from historically high prices above $100? The United States couldn’t carry on releasing the oil indefinitely, so the Kremlin might just take the hit, adjust fiscal spending and knuckle down until America’s ploy had run its short course and prices rose back to their market level—assuming a hurricane, Middle East war or pipeline explosion hadn’t pushed prices up again in the interim anyway.
To work, the move would also need cooperation from Saudi Arabia and other OPEC exporters, who could otherwise withhold supply from the market to balance out extra SPR barrels if they felt a fall in prices was not in their interests. Saudi Arabia, angered by the Kremlin’s backing of Bashar Assad in Syria, might welcome the chance to punish Putin. But it could just as easily balk at the economic cost: Many of the cartel’s members now depend on triple-digit oil prices to keep their fiscal budgets in the black. In any case, if Riyadh had wanted to use oil sales as an economic weapon, it could have done so at any point in the past three years, and hasn’t.
Nor is it in American interests to start driving down the crude market. Ten years of high oil prices, painful at first, have helped wean the United States away from foreign oil. Demand has slowed down, partly because of rising efficiency. Meanwhile, supply has soared. As everyone who follows global energy knows, this has slashed U.S. oil imports and should soon make it the biggest oil producer in the world.
Ask George Bush Sr. Back in September 1985, when Saudi Arabia was plotting the market-share grab that would end up decimating Soviet oil revenue, the then-vice-president was the one pleading with Saudi oil minister Sheikh Yamani not to open the valves. Flattening prices, Bush knew, would kill off the revival in U.S. oil production. (A story told in The Prize, Daniel Yergin’s epic history of the oil business.) The same threat now hangs over the unconventional oil spurting out of Texas and North Dakota. Triple-digit oil prices justify the high costs needed to blast the stuff out of low-permeability rocks. Analysts don’t agree on what the break-even price for this new marginal oil supply is—some say $65a barrel, others $100—but a falling market could wreck the tight-oil boom.
The other way to hurt the Russian petrostate is to target its gas exports. Russia shipped 167 billion cubic meters of gas to Europe last year—a third of the continent’s consumption. Almost half of this gas passed through Ukraine and previous spats between Moscow and Kiev left the EU countries, and especially some in the east that depend on Russia for all their supply, in no doubt about their vulnerability.
But the frenzied call in Washington, D.C., to ship American shale-gas in the form of liquefied natural gas (LNG) to Europe, and even as far as Ukraine, doesn’t make much sense (not least because Ukraine doesn’t have an LNG receiving terminal). Even when the United States becomes a net exporter of natural gas (it’s still a net importer, despite the hoopla), it’s important to remember that the U.S. federal government doesn’t sell gas—companies do. American vendors will send their LNG to the customers who pay most for it. They live in Asia, not Europe. Thanks to the nuclear shutdown in Japan, the world’s biggest LNG importer, and roaring demand from China, Europe’s imports of LNG have fallen steadily in the past three years, while Asia’s have soared.
This can change, but only if Europe’s consumers are willing to pay more for energy. Goldman Sachs thinks LNG to replace some Russian gas in the event of a shutdown of some supplies would be 35-40 percent more expensive. But Brussels has fretted over energy security for years, with little to show for it aside from moves that ultimately tightened Russia’s grip on the EU. Grand plans to diversify Europe’s supplies, conceived by some as finding alternatives to Gazprom’s gas, morphed into bypassing Ukraine, which was seen as the real basket case hindering European energy security. To that end, the Russian firm built the Nord Stream pipeline across the Baltic Sea to Germany and hopes to have another, South Stream, which would send gas through the Black Sea into southeastern Europe, on line by 2016.
Europe tried to line up alternatives to South Stream. But Moscow is better than Brussels at energy geopolitics. One by one, it picked off the countries that would have been crucial to the EU-backed Nabucco pipeline, offering them long-term supplies of energy while Nabucco’s developers hunted fruitlessly for alternative gas sources in Central Asia. The EU’s efforts to get access to Middle Eastern supplies for Nabucco were paltry. The project, which would have gathered gas in Turkey before snaking through the Balkans to Austria,failed.
Meanwhile, Gazprom has been keen to diversify its options, too. When Putin visits Beijing in May, he will probably sign a new gas-supply deal with China, opening that enormous market to Gazprom. The latest friction between the Kremlin and Brussels plays nicely into Beijing’s hands. But it also convinces Russia that its energy future lies not in Europe’s stagnant market but in Asia’s growing one. Japan, South Korea and China will all take more LNG from Russia in the coming years, too.
If the West really wants to use energy to beat Russia, there are some options—
but they won’t hurt the Kremlin now or do anything to change the dynamic in Ukraine, and some of them involve more cooperation with Russia, not less. A genuinely liberalized market, for example, would let Gazprom keep exporting to the EU, but force it to open its pipelines—especially South Stream—to other suppliers. Building better interconnecting pipelines within the EU would let eastern countries access supplies reaching elsewhere in the continent, forcing Gazprom to compete with LNG, Norwegian or even North Sea gas landing in Western Europe.Opposing shale gas and nuclear power in the EU, meanwhile, is useful idiocy on the Kremlin’s behalf. Brussels needs to be clear about that, but realistic about how long it will take to deliver supply from either.
The other solution lies in the Middle East. If driving down energy prices is the West’s long-term strategy for breaking Putin, then the region is key. Iran, holder of the world’s second-largest gas reserves, is a natural competitor to Russia in Europe and could once again be a major oil producer. Sanctions hold it back. The return of Libya’s oil, disproportionately important to global markets because of its high quality, would also help. Sorting out Iran and Libya would add about 2 million barrels per day to the world’s oil supply capacity and defuse some of the risk premium on oil prices. Rising output from Iraq will also loosen the market.
The problem is that Putin knows all this, too. Perhaps better than we do. And the West needs his cooperation to bring some stability to the region. That’s why, if it comes to an energy war with the West, the world’s biggest oil producer will happily watch the Iran talks fail, the Middle East burn and Russia’s crude keep flowing to the world’s needy oil consumers. And Vladimir Putin will be laughing all the way to the bank.
