Having now denied many European countries gas for 10 days, Russia may have brutally exposed the vulnerability of the European Union. But it has also shot itself in the foot and forced the EU to get serious about cutting its exposure to Russian provisions. In the end, Moscow’s only long-term reward may be the hope it has done irreparable damage to Ukraine’s pro-Western ambitions.
Normally, it would be big news if a former communist superpower, that has displayed totalitarian tendencies in recent years, cuts off natural gas to Europe in the dead of winter. Not only does natural gas provide heat, but it powers factories, too — and we don’t need factories closing during a recession because that’s how depressions start. I should be paying more attention to this story, but Bush is leaving office, Obama is being inaugurated, and this makes for retrospective and introspective pieces coming from the fourth column the past couple of weeks… Then there’s Gaza, and Zimbabwe… So along with everyone else, I’m guilty of putting Russia on the backburner (pun intended).
Since my full attention is not on this story, I can’t comment on the latest news with fully informed intelligence. But here’s some factors to take into account when pondering this news.
First of all, I don’t know the prices being batted around by both parties. How much is Russia charging for natural gas? What is the Ukraine charging Russia for use of their pipelines to transport natural gas to European markets? Why isn’t this being talked about int he media? I’m remiss to say much until I know those facts.
But this I will say: Whenever Russia shuts off natural gas in the dead of winter (which it has done in 2006 and 2007, too), it’s making a statement: We will let you freeze until you recognize the influence we have over you. After all, if this was a dispute solely over commodity prices, then why doesn’t Russia shut off gas in the summer months?
Currently, Europe has no other place to turn for cheap energy. With 47.57 trillion cubic meters of reserves, Russia has the most natural gas in the world. Next on the list are Iran with 26.37 trillion cubic meters of gas, and Kuwait with 25.79 trillion cubic meters. In fact, those three countries make up 57% of the world’s natural gas reserves. This shows us the power Russia has over this commodity. So where else can Europe turn? America imports natural gas to suppliment its needs, so we can’t help; and America won’t let other countries do business with Iran. Regardless, even if gas from Iran and Kuwait could replace the Russian supply, the cost of gas would double — maybe even triple — due to increased transit costs along with supply shocks with Russian gas not being sold, hence not coming onto the market. No doubt, this has European nations thinking things like, “How quickly can nuclear power plants be built?” Maybe in the future Europe can ween itself off Russian natural gas, but for now it’s stuck.
As for the Ukraine, Russia is still pissed off that the country is no longer part of the Russian Empire — an entity they would love to see resurrected. So anything that sticks in the craw of the Ukraine, Russia is happy with. Which partly explains the spats these two countries have.
Russia is also in trouble, too. This comes back to the importance of commodity prices. The Russian economy is dependent on oil and natural gas. Russia felt confident enough to invade Georgia when oil sold at $100 a barrel, but prices have dropped drastically since August 2008. That’s a lot of money removed from Russia’s budget — which could cause some panicking. Typically, natural gas costs are half that of oil, but recently gas prices have jumped to (as of today) $27.84.* Currently, crude is trading at $36.51 a barrel, so we see that natural gas is roughly two-thirds the cost of oil now instead of half the cost, which is usually the norm. Russia shutting off natural gas to Europe as a lot to do with the gas price hike, I imagine, and Russia likes this — except they’re not selling any natural gas right now!
I’m not sure what Russia’s strategy here is. If they wish to raise the price of natural gas they are succeeding, but for how long? Once Russian gas supplies go back on the market, the price should drop again. And Russia’s right back where is started, selling cheap oil and gas and worrying about its budget.
I’m wondering what Russia’s long term strategy is. (I certainly hope the incoming Obama administration is, too.) But for now, just like everybody else, this is something I’ll have to wonder about after Tuesday.
* – Pricing explaintion: Natural gas sells per MMBTU, which is 1,000,000 BTUs of energy. Currently, one MMBTU of natural gas is $4.80. But a barrel of oil contains 5,800,000 BTUs of energy. So to compare the costs of natural gas and oil in regarded to energy output, the current price of natural gas must be multipled by 5.8. So 5,800,000 BTUs of natural gas currently costs $27, a opposed to 5,800,000 BTus of oil which currently costs $36.