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From: IRASTRAUS@aol.com (Ira Straus)
Date: Sun, 2 Dec 2001
Subject: Russia as an Oil Ally, corrected version

The Russia Journal
December 1-7, 2001
How to keep Russia as an Oil Ally of the West and destroy OPEC:
Bring Russia into IEA, compensate it if oil falls too low

By Ira Straus
(corrected version)

Ever since Mr. Putin visited Germany and promised to keep the oil flowing no matter what the Islamic countries do, Russia has been an oil ally of the West. It is Russia's refusal to coordinate with OPEC this week that has driven down the price of oil and given the world economy a chance of avoiding a serious depression. Keeping Russia in this posture would be worth tens of billions of dollars a year to America and its allies in Europe and Japan.

The opportunity is enormous. If the new Russian attitude can be locked in, oil prices can be kept low and the power of OPEC broken permanently. It would be a great boon for the West, and for the Third World as well -- India, China, subsaharan Africa, South America.

The problem is that Russia has an interest in high oil prices. Each drop of $1 in the price of oil means a loss of nearly $1 billion to Russia -- but a gain of nearly $10 billion to the West, and a $15 billion gain for global economic growth. Our gain is huge, but Russia's loss is also big. This puts pressure on Russia to cooperate with OPEC -- strong, daily pressure. It is something that Russians inevitably think of every time they talk about the national budget, debt repayments, domestic spending... There are constant incentives to abandon the pro-Western line.

OPEC has quietly invited Russia to join the cartel. There are many Russians who would like to join OPEC. Some Russian oil companies argue in favor of joining OPEC. This would be a disaster for the West.

Russia cannot continue very long to ignore the incentives for a pro-OPEC policy -- not unless the West does something to change the structure of its incentives, so that low oil prices cease to cost Russia. Only then will Russia be able to maintain a pro-Western policy indefinitely.

How could the incentives be changed for Russia? It can be done in three simple steps:

1. Bring Russia into the International Energy Agency (IEA).

2. Set up a price-compensation scheme within IEA, so that oil-exporting members have an incentive to support low oil prices. The scheme would be as follows: When oil prices dip below a mutually agreed fair price, say $20 a barrel, Russia would be fully compensated for its losses by all the other IEA members who gain from cheap oil prices (Europe, U.S., Japan; Norway might also be compensated). This would eliminate the incentive for Russia to keep oil prices high. It would free Russia to compete ruthlessly against OPEC. The price of oil could plummet. It could never rise high again.

3. Have the West greatly increase its imports of and investments in Russian oil and gas, in return for Russia's granting Western countries control over some pipelines through the country and renouncing the right of restricting the flow of oil through those pipelines. This would guarantee Russia a huge market and would guarantee the West stable supplies independent of the Islamic world.

And that in turn would be enough to break the back of OPEC, keep oil prices low, and keep deliveries reliable for decades to come.

A few details: The price compensation for Russia is a win-win proposition; the rest of us would pay out only a fraction of what we'd gain from it. With each drop in oil prices, we gain about ten times as many dollars as we'd pay to compensate Russia for its losses. It's an investor's dream: for each $1 put into compensation transfers, we lock in a $10 return for the long run. It's a net profit both for the West and for Russia. A domestic energy price stabilization policy could be established, by setting up an extra tax to kick in on imported oil when it is coming in at less than $20 a barrel; this would more than finance the compensation payments. The price level at which compensations and taxes kick in could be reviewed every few years, in light of technological developments which can change the level of realistic oil pricing.

As an IEA member, Russia would get a full role in planning global energy strategy together with the West -- a well-earned role, not a make-believe one. Here Russia would find its dignity working side-by-side with the West. The alliance would be serious and solid. Russia would be anchored to a role within a productive international economy, rather than being left with a cartel-and-extortion mentality. It would become an organic part of the Western economy with an undivided interest in our success, growing with us and sometimes suffering with us, rather than on an opposite cycle.

A broader problem would perhaps remain: vast sums of oil wealth, even if only half as much as before, would still be going to Islamic regimes that did nothing to create the oil or the technologies that make it useful. These regimes are collecting a huge rent on oil that sits, quite by accident, beneath the sand onto which their societies landed many centuries ago. They have not troubled to integrate their windfall wealth with their societies, which mostly remain monstrously unjust and unmodern; instead they use the money as a toy for pet projects such as financing Islamist extremist schools around the world, sponsoring terrorists, and trying to buy an atom bomb. It is an injustice to all the productive societies in the world: to the rich productive societies, which invented the means for using and extracting oil; to the poor productive societies, which cannot afford the extortionate pricing.

Carlos Escude, an Argentinian international relations professor and theorist of realism about Third World injustices, has suggested a simple cure to the evils of the oil-controlling regimes. "As things stand today," he has written, "our only way out is to replace the Ottoman occupation of yore with a permanent U.S. occupation of the less populated states of the Persian Gulf." Escude has some moral credibility in such matters; he played a role in getting his own country to renounce its nuclear weapons program.

In practice, however, it is unlikely that the world is ready to face this question. And if it did face it at some future date, any solution would probably end up taking a more circuitous form, such as internationalizing the ownership and authority over the oil fields in all countries where the oil production or reserves exceed the population by some defined ratio, and paying a modest rent to the host societies.

Meanwhile, the practical issue for today is that of bringing Russia into the IEA and setting up a compensation scheme for low oil prices. This would suffice to undermine OPEC and anchor Russia to the Western economy. It would give the world economy a big boost in the form of low oil prices, and would reduce the financial base for international terrorism. And it would guarantee the energy security of the West for decades to come.

The writer is Fulbright professor of international relations at Moscow State University and at the Moscow State Institute of International Relations, and is U.S. coordinator of the Committee on Eastern Europe and Russia in NATO.

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