Date: Mon, 8 May 2006
From: "Gabe Collins" <gabe.collins@gmail.com>
Subject: Russia's gas weapon
Dear Mr. Johnson,
I am a 2005 Princeton grad (AB, Politics, cum laude) who speaks Russian and Chinese, and will be joining the Naval War College on May 30 as a research fellow. Given the current situation with respect to Russia and the questions about its reliability as an energy supplier, I thought that you might be interested in my piece, which in 620 words analyzes Russia's use of gas exports as a political weapon and shows why gas exports are a much more effective political weapon than oil exports are.
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Russia’s Gas Weapon
By Gabe Collins
Russia wields a formidable energy weapon. Many countries in Europe and the former Soviet Union get the bulk of their natural gas from Russian pipelines and are thus dependent on Russia’s goodwill to keep their homes warm and factories running. These supplies cannot be readily substituted in the short and medium term and the Kremlin realizes that this makes gas a much more effective energy weapon than oil.
It is virtually impossible for an oil exporter to selectively punish one or two importers because if, for example, Iran embargoed the United States, its shipments would be replaced by oil from Mexico, Nigeria, or any other exporter. World oil prices would rise due to the supply shortfall, but oil would be re-allocated along market lines and the market would re-balance. The 1973 Arab oil embargo aimed to punish Holland and the U.S. for their pro-Israel stance, but it failed because oil prices rose for all consumers and the market re-allocated available oil through third party traders to anyone who could pay. The tightly interconnected world market quickly turns any major supply cutoff into a corporal punishment session that financially harms all oil importers.
Unlike oil exporters, natural gas exporters can credibly threaten specific importers with supply cutoffs. The international gas market is nowhere near as fungible as the oil market, giving exporters far more power to single out and squeeze importers. The January 2006 “gas war” between Russia and Ukraine showed Europe that countries receiving the majority of their gas through pipelines from Russia have no readily available secondary supply sources. This puts them in a precarious position if the Kremlin decides to shut the gas off. Europe will likely try and break its dependence on Russian gas by developing new supply sources such as liquefied natural gas (LNG) terminals and pipelines from Norway and North Africa. Over the next 10-15 years, this has the potential to erode Russia’s influence on Europe’s gas supply and reduce its income from European gas sales.
However, this is not likely to work. Russia can defend its dominant supply position by flooding the European market with cheap gas that makes LNG and other supply sources uneconomic. LNG projects and new pipelines cost billions of dollars and require gas prices to stay above a certain range in order to recover project costs. Governments would then be forced to choose between dependence on Russian gas, or subsidizing LNG imports and other supply projects to break Russia’s grip on the European gas market. Russia is in a strong position because its state-controlled gas exporter, Gazprom, can emphasize political objectives as much as it does commercial goals. In addition, Russian pipelines have operated for many years and have already paid for themselves, eliminating the need to keep prices high to pay off project costs.
Russia lacks the Soviet Union’s military power and is instead using its rich energy supplies to gain international influence. Gas flowed uninterrupted to Europe despite the Afghan war, the 1983 war scare, the Moscow Olympic boycott, and the putsch against Gorbachev. Now Russia sees gas as a tool for keeping Ukraine, Georgia, and other neighbors within its sphere of influence.
Russia’s January 2006 use of the gas weapon shocked importers who took Russian gas supplies for granted over the past 30 years. Booming global energy demand and perceived supply scarcity put Russia in a position of power. The gas weapon will be the broadsword of Russia’s new arsenal and Europe would be wise to begin building an effective shield. The clock is ticking, as Gazprom is presently working to gain control of gas marketing and distribution assets throughout Europe, which would give it comprehensive control over much of Europe’s gas supply.