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Energy Insights: Energy News: Pay up or dance to tune of foreign energy suppliers

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Pay up or dance to tune of foreign energy suppliers


American Account
UKRAINE is the West writ small. Its confrontation with Russia over energy supplies, during which President Vladimir Putin gave "cold war" a new definition, is a warning to big energy-consuming countries that their long-term prosperity is in the hands of very dangerous people.

The Opec cartel is not the most reliable supplier of the oil that advanced economies need to keep their trucks moving, their planes flying, and some of their homes heated. These oil-producing countries have combined to keep prices above competitive levels, and did not hesitate to stop supplies in 1973-74 when dissatisfied with American foreign policy. They include, most notably, Saudi Arabia, which nevertheless tries to pass itself off as a reliable supplier of energy, as does Putin.

Putin kept a straight face when he announced that his willingness to restore gas supplies proved that Russia was a reliable supplier. Never mind that it was on his orders that Gazprom cut off supplies to Ukraine, and by extension to Germany, France and other countries, despite contracts that run until 2009.

Remember: this dispute was not only about prices. Belarus, the former Soviet republic that elected to stay within Russia's sphere of influence, has not faced the heavy price increases that Gazprom has imposed on the more western-orientated Ukraine, Georgia and Moldova.

Putin's message is clear: Russia's energy resources, now completely under state control, provide it with a new weapon, petropower - and he will use it to restore Russia's influence to the level it enjoyed when it was a superpower.

That's what the destruction of Yukos was all about, and that's what the renationalisation of Russia's energy infrastructure is all about. Putin reasons that if oil could be used for decades to mute American criticism of Saudi domestic policies, Russian oil and gas can be used to stifle western criticism of his increasingly dictatorial policies at home.

Cutting gas supplies to Europe had no direct effect on America. But it served as a warning that what is left of the nation's energy security strategy is in tatters. The Bush administration had hoped that Iraq would return to world markets as a large, American-friendly oil producer. The Pentagon had predicted that Iraq would ratchet up its production to more than twice the pre-war level of 2m barrels a day. In the event, output has stalled at a little more than 1m barrels as sabotage and decades of underinvestment combine to limit production, and virtually free petrol for Iraqis keeps domestic consumption so high that there is little left to export.

The second strand of Bush's policy was to persuade Congress to open up parts of Alaska for drilling. Congress refused.

Finally, the White House sought to reduce its exposure to Opec by increasing purchases from Russia. That, too, has come a cropper: Putin has invited Opec representatives to a meeting to co-ordinate their policies with his.

And there's worse. Venezuela, one of America's top crude-oil suppliers, had always been a reliable business partner, even honouring its contracts when the Arab members of Opec instituted their boycott. Now, the country is run by the rabidly anti-American, pro-Castro Hugo Chavez.

He has raised taxes, sued for back-taxes (shades of Putin's assault on Yukos), forced international oil companies to give Venezuela's state-owned PDVSA majority ownership of their concessions, and forged an anti-Yankee alliance with other Latin-American oil producers such as Bolivia's Evo Morales.

All this is bad news for countries such as America and Britain where companies such as Exxon and BP operate within the constraints of shareholder-imposed requirements to maximise profits. They are players in a game that is increasingly dominated by state-run entities pursuing aims that have nothing to do with simply maximising profits.

Putin keeps prices to favoured allies below market levels; Chavez makes cheap oil available to Cuba; Middle Eastern countries, except possibly Kuwait, refuse to let western oil companies invest capital and expertise to develop new reserves even though the host countries would benefit. And China pumps $1.2 billion into Sinopec, a listed company, to cover its losses. These are the acts of power-maximisers, not profit-maximisers.

These geopolitical players have raised the price of the premiums that policymakers in Western oil- and gas-consuming countries should be willing to pay for energy security. Since the risk of supply interruptions and price rises has increased, so must the willingness of consuming countries to pay for insurance against those higher risks.

That probably means taking these risks into account when calculating the viability of nuclear power and other non-hydrocarbon energy sources. It means, too, being willing to finance on generous terms the construction of the proposed oil pipeline to bring Caspian oil to market. And for America, it means both adopting a carbon tax and taking a tougher line with Mexico. The Mexican government, rich in oil and natural gas, won't allow American firms to help develop those resources. So its economy stalls and job-hungry Mexicans stream across the border to find work in the United States. It might be time for President Bush to explain to his Mexican counterpart that immigration policy will henceforth only be as open as Mexico's oil investment policy.

None of these steps, or any being proposed by Andris Piebalgs, EU energy commissioner, will soon reduce the risk created by dependence on suppliers who are more than mere profit-maximising sellers. Too bad Western Europe's gas-consuming nations didn't heed Ronald Reagan when he tried to persuade them not to build gas pipelines to Russia. 

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute. He has served as a consultant to many energy companies and advises a leading developer of wind farms

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