The Russian energy challenge

Two years ago, Scottish members of the British Parliament expressed concern about the prospect of being at the end of the pipeline delivering natural gas from Russia. They feared their economic and political autonomy would suffer from such energy dependence. Last January, a chill was sent throughout Europe when Russia temporarily cut off its natural gas shipments to the Ukraine in a dispute over prices. Since the same pipelines serve the rest of Europe, they, too, experienced a decline in supplies and increase in prices.

In the 1980s, it appeared the United States had found a key to toppling the Soviet Union. In an agreement with the United States, Saudi Arabia flooded the market with oil, driving its price so low that facing bankruptcy, the Soviet Union allowed itself to dissolve.

In its market-oriented reorganization, Russia sold off its oil and gas supplies to private firms and secured loans from the International Monetary Fund to assist its economic recovery. Two private energy firms, Yukos Oil and Lukoil, emerged as major owners, with Yukos controlling 20 percent of Russian oil.

When Putin became president in 2000, he set out to regain national control over Russia’s vast energy resources—it has the world’s largest natural gas reserves, and is the world’s second-largest exporter of oil. His intent was to use energy revenues to re-establish Russia’s economic and political independence and pay off its loan from the International Monetary Fund, freeing itself from loan conditions. A significant move was to recapture the energy holdings of Yukos Oil by forcing it into bankruptcy and bringing its assets under government control.

Through state-owned Gazprom, Russia is expanding control over its energy resources and the pipelines serving its exports. Faced with declining energy supplies, both eastern and western Europe are increasingly dependent on energy from Russia. China and Japan both are negotiating with Russia for increased supplies. As anticipated by Putin, diminishing supplies and rising prices have improved the Russian economy and its international political power.

Russia supplies about 25 percent of Europe’s gas demand. Following its January success in forcing price increases on the Ukraine, Russia has continued to demand higher prices from other former members of the Soviet Union. This heating season, both Georgia and Moldova agreed to higher prices. Russia also wants higher prices for the gas it supplies to Belarus and Azerbaijan. Russia believes prices should eventually rise to the level Europe pays for its other sources of natural gas. Russia also seeks 50 percent ownership of the pipeline through which gas is delivered to Belarus.

This fall, Russia forced Shell Oil and its Japanese partners to sell their controlling interest in the Sakhalin-2 oil and gas field to Gazprom. The project is just north of Japan, which expects to be a major purchaser of the much-needed fuel. Russia recently refused to allow Exxon-Mobil to expand the project in nearby Sakhalin-1.

Another shock to American energy interests was the decision by Gazprom to develop the giant Shtokman natural gas field in the Barents Sea north of Murmansk without Chevron or Conoco Phillips. The United States had expected the gas would be liquefied and shipped to supplement our natural gas needs. Instead, it appears the gas will be shipped directly to Germany via a new pipeline.

The increasing European dependence on Russian gas supplies raises the specter of more of the world’s energy transactions being conducted in Euros, undermining the role of the dollar in the world economy.

The declining value of the dollar is likely to force the United States to reduce its debts, cut its oil imports, use energy more efficiently and increase its use of renewable energy.

Drs. Robert and Sonia Vogl are founders and officers of the Illinois Renewable Energy Association and coordinate the annual Renewable Energy and Sustainable Lifestyle Fair. They have 3.2 kW of PV and a 1 kW wind generator at their home. Forty acres of their 180-acre home farm are in ecological restorations. They are also active in preserving natural areas. They are retired professors from Northern Illinois University.

From the Jan. 3-9, 2007, issue

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