Kremlin a la Saud

Thursday, January 5, 2006

OIL SEALED its reputation as a "strategic" commodity in the 1970s, when a cartel of suppliers held Western economies for ransom. Since then, new exploration and technology have multiplied the number of producers, making it harder to use oil as a political weapon. Today an unfriendly state such as Venezuela cannot hit Western consumers by pushing prices up, because prices are set in a global market. It cannot harm a consuming country such as the United States by withholding oil shipments, because the United States would simply buy its oil elsewhere. Oil remains strategic in some ways; governments should be worrying about the vulnerability of pipelines, tankers and refineries to military action or terrorist sabotage. But the proliferation of oil sources has greatly reduced the risks to consuming nations.

The current confrontation between Russia and Ukraine shows how the natural gas business resembles the oil market of the 1970s. Most gas is transported by pipelines; if the producer country decides to reduce output, the consumers on the other end of the pipe may not have an alternative source of supply. This allows rogue sellers to bully buyers, including for political reasons. To punish Ukraine's democratic and pro-Western government, Russia demanded that it accept a quadrupling in its gas costs or face mid-winter shortages.

Sellers don't have all the power, as the Ukraine story shows. The Ukrainians responded to the Russian threat by siphoning off gas intended for European Union customers, annoying those customers enough for Russia to worry about losing its reputation as a reliable supplier; as a result, Russia restored gas flows to Ukraine quickly. But it's important to grasp that consumers won't win many future battles if they allow the natural gas market to become even more like the 1970s oil market than it is now.

For the moment, Russia cares about its reputation as a reliable supplier because it is building and planning new pipelines linking its gas fields to both Europe and Asia. Until consumers sign on to Russia's plans, the threat that they might seek gas from other sources is a real one. But once they agree to the Russian pipelines and plan their energy consumption around them, consuming countries may lose their leverage, and the Russian instinct to use gas as a political weapon will face no effective check. Already Germany imports two-fifths of its gas from Russia, and the share is set to jump with the construction of a new pipeline under the Baltic Sea.

Russia has more than a quarter of the world's proven reserves of natural gas, and further exploration may boost that share above 30 percent. There is no escaping the fact that it is the Saudi Arabia of the gas market. The second-biggest player is Iran, which is not exactly comforting. Consuming countries need to think hard about how to dilute Russia's price-setting power, either by building pipelines to bring in diverse supplies or, most promisingly, by building the facilities needed to import gas in its liquefied form, on tankers. High-volume global trade in liquefied gas would make this commodity look a lot like oil -- the good oil of today rather than the malign oil of 30 years ago.

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