Russia is a Key Link to Oil

To give you an idea of where this article by a "distinguished professor of economics at the University of Mississippi" is coming from, I present you a self-explanatory quote by him - "...Russia's invasion and occupation of South Ossetia..."



Russia is a Key Link to Oil

December, 2008

If President-elect Barack Obama and his top advisers learn nothing else from Russia's invasion and occupation of South Ossetia this summer, it should be that Moscow aspires to be an energy superpower. Russia already is the world's second-largest producer of oil, pumping nearly 10 million barrels a day, and is the largest supplier of natural gas. Like all energy-exporting countries, Russia benefited enormously from the run-up in prices over the last decade. Every $1 increase in the price of a barrel of oil transferred about $1 billion into Russia's state budget. As a result, Russian foreign exchange reserves grew from $12 billion in 1999 to $470 billion at the end of last year, a balance equaled only by such countries as China, India and the Middle East oil producers.

Revived Russia

When its tanks rolled into Georgia, the Kremlin sent notice it intends to dominate the oil and natural gas resources of the former Soviet republics in the Caspian Sea basin, raising the threat of supply disruptions to Europe. That possibility could give Russia political leverage over Germany, the Czech Republic, Slovakia, Ukraine and other Central and East European countries that rely heavily on Russian fuels. As rising oil prices strengthened the Kremlin's hand, Mr. Putin clamped down on Russian businessmen, most notably by prosecuting and imprisoning Yukos Oil Co. Chief Executive Officer Mikhail Khodorkovsky. The new Obama administration needs to realize Russia has a potential stranglehold on America's European allies and will play its energy card when it wants to: to block the further expansion of NATO, for example, or the EU.

What's next?

Russia's next likely move, which could be delayed until the global economy starts picking up again, will be an attempt to orchestrate a global natural gas cartel patterned on the Organization of Petroleum Exporting Countries. About 15 gas-producing countries, led by Russia and Iran, met in 2004 and agreed to establish an "executive bureau" to coordinate "interests" in the global gas market. As world demand for natural gas begins to outpace supply, incentives for collectively reducing production and increasing prices will strengthen. For the United States, a combination of conservation, increased energy production and improvements in energy efficiency is the best defense against volatile oil and gas prices and Russian blackmail.

The most important step the United States can take on the energy front is to use more coal and nuclear power. America has a 250-year supply of coal, more plentiful on an energy-equivalent basis than the oil reserves of either Saudi Arabia or Russia. The president-elect should re-examine his position on coal in particular. "Clean coal" is not an oxymoron. Building more coal-fired power plants that use new technologies to capture and store carbon dioxide emissions deep underground and converting coal into liquefied fuel for transportation are sensible policies. Increasing our reliance on coal and nuclear power would free up natural gas for household and industrial uses and go a long way toward immunizing the United States from both OPEC and Russian blackmail.

William F. Shughart II is Frederick A.P. Barnard Distinguished Professor of Economics at the University of Mississippi and a senior fellow at the Independent Institute, Oakland, Calif.


Gazprom Threatens New Ukraine Gas Cut

Russian energy giant, Gazprom, says it will stop gas supplies to Ukraine starting January 1, until the country pays off its $2 Billion gas debt for supplies in November and December, and a new contract is concluded. On Thursday Gazprom spokesman Sergey Kupriyanov said the talks are in a deadlock. He said Ukraine has transferred $800 million for repayment of gas supplies in autumn, but also informed Gazprom that no more money would be transferred until the new year starts. “Thus we would have no legal grounds to supply gas starting January 1 and we won’t be able to turn to direct contracts with Ukraine until the debt is paid off,” Kupriyanov said.

The two sides have been negotiating for the past two months over a settlement of the gas debt but with no result. Also, Gazprom Deputy CEO Aleksandr Medvedev said the company has offered Ukraine several options to settle the issue, taking into consideration the complicated economic situation in the country, before adding “Unfortunately, none of the offered schemes were accepted to further settle the issue.” This comes after the signing of a memorandum, on gas cooperation, on October 2 between the Prime Ministers of Russia and Ukraine, Vladimir Putin and Yulia Timoshenko.

One of the key points of the document is the possibility of direct long-term cooperation between Gazprom and Ukraine’s Naftogas starting from January 1, 2009. It also facilitates Gazprom directly selling up to 7.5 billion cubic metres of gas per year, to Ukrainian consumers. The document also confirms the intention to move step-by-step to mutually agreed market gas prices for Ukraine, and specifies prices for gas transit through Ukraine’s territory. The necessary condition, specified in the memorandum, is paying off the gas debt in full by Ukraine’s Naftogas company.


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