Putin Plays a Game of Pipeline Politics

In 2005, the world was reminded of what happens when the amount of oil and gas needed by consuming countries equals or exceeds the amount producing countries can pump: Prices go up rather sharply.

But last week we learned that tight supplies carry another risk: energy blackmail.

That lesson came from Russian President Vladimir Putin, who started the new year by shutting off the flow of natural gas to Ukraine. Putin explained the move as a temporary but necessary step to force Russia's neighbor to begin paying market rates for energy it had long received at a steeply discounted price. But to others it was yet the latest example of Putin's ham-handed attempt to use the energy weapon to punish a former republic that had turned its back on the Kremlin.

Unfortunately for Putin, the same pipeline that supplies Ukraine also supplies much of the gas for Western Europe, which woke to the new year to find that its supply had been reduced by as much as 40 percent as well. Howls of protest forced Putin to quickly patch up a face-saving deal that restored the flow of gas in exchange for what amounted to a partial price hike for Ukraine. But the real loser was Putin, who only reinforced his reputation as an authoritarian bully who never accepted the demise of the Soviet empire and has not embraced the rule of law. Rather than strengthen Russia's reputation as a reliable energy supplier, Putin's Ukrainian gambit merely reminded his European customers of the need to hedge their bets with alternative energy sources.

Even before the New Year's imbroglio, Putin had been trying to muscle Poland and the Baltics with a plan to serve Western European markets by laying an expensive and environmentally risky new pipeline under the Baltic Sea, bypassing their territory and denying them lucrative transit fees. And while it might have seemed a clever idea to recruit former German chancellor Gerhard Schroeder as chairman of the board of the new venture, it played badly back in Germany, where it was widely viewed as an unseemly attempt by Schroeder to cash in.

Russia, of course, is not the only country to view energy in geopolitical terms. Crude-rich Venezuela has made a lot of noise about using its government-owned oil company to reward neighbors who join it in standing up to the United States. And China, rather than relying on private markets to meet its enormous energy needs, is desperately seeking to seal long-term supply contracts, joint ventures and pipeline deals in the wake of its failed bid last year for Unocal.

Meanwhile, prices keep rising. Crude oil futures ended the week above $64 a barrel, up nearly 10 percent since Christmas.