A sense of foreboding pervades Philip Stephens's examination of the Russia-Ukraine natural gas dispute that emerged as the first political crisis of 2006, viewed through the lens of energy politics.  --  The London Financial Times columnist concludes:  "The great power conflicts of the late 19th and early 20th century suddenly seem eerily familiar.  I have often heard it said that the market will eventually solve all these problems.  Higher prices will ration demand and drive the innovation and conservation measures needed to reduce our dependency on oil and gas -- and in the process rescue us from climate change.  It is a nice thought.  Eventually, though, may well prove to be too late.  Markets cannot second-guess power politics.  Best to turn down the central heating again." ...

Comment & analysis


By Philip Stephens

Financial Times (UK)
January 5, 2005

http://news.ft.com/cms/s/667a7cac-7e1e-11da-8ef9-0000779e2340.html (subscribers only)

At first glance the story had a tolerable if not quite a happy ending. For a moment this week Europeans shivered at the prospect of a winter of disrupted gas supplies. They were confronted with the long obvious, but wilfully unacknowledged, reality that most of Europe depends on the good will of Vladimir Putin's Kremlin to keep warm. Then, just as the chill set in, Russia and Ukraine swerved to avoid a collision. The rest of us could turn up the central heating and fret again about climate change.

Would that were so. A first draft of history may well view the fight between Moscow and Kiev over the price of Russian gas as an adjunct to the power struggle between Mr. Putin and Ukraine's Viktor Yushchenko. A more reflective judgment may see it as the first skirmish of an era in which the scramble for hydrocarbons became a prime threat to global stability. Either way, energy security, or more accurately, insecurity, has forced its way up the geopolitical agenda.

Mr. Putin, of course, had rather different hopes for Russia's first presidency of the Group of Eight leading nations. It was always planned that energy would provide the focus when G8 leaders meet in St. Petersburg later this year. After all, put aside its decaying nuclear stockpile and oil and gas are all Moscow has to justify a place at the G8 table. But Mr. Putin's intention was for Russia to be cast as the reliable partner in a world ever more dependent on fossil fuels.

Instead we have seen the Russian president treat his country's vast gas reserves as the bluntest instrument of foreign policy. Moscow had a legitimate case in seeking a market price for its gas. But the manner in which it sought to impose an immediate fourfold increase owed more to Mr. Putin's desire to settle a score with the westward-leaning Mr. Yushchenko than to any financial considerations. The Orange revolution was a powerful blow to Moscow's prestige as well as to its perceived interests in Russia's near-abroad. Mr. Putin does not like losing. The message for those who do business in Russia is the obvious one. Gazprom is a servant of state power rather than a commercial enterprise. Contracts are sacrosanct only in so far as they suit the Kremlin's purpose.

The bigger lesson is the extent to which rising demand for finite energy resources is already remaking the strategic landscape. This week's spat was a fragment of an altogether more disturbing picture. For now, Islamist terrorism, failed states, and unconventional weapons pose the most visible threat to global security. Rival claims on scarce energy supplies will soon come a close second.

You do not have to believe that oil was the motive for the U.S. invasion of Iraq to see how energy has been reshaping the foreign policies of the major powers. Much of Europe's policy towards Moscow has been long driven by its need for Russian gas. The obsequiousness towards Mr. Putin of Gerhard Schröder, the former German chancellor, was only the most egregious example.

Look further east and Europe's policy towards the Caucasus is inextricably tied to Caspian energy reserves. In theory, the west wants a peaceful transition to democracy in places such as Azerbaijan and Kazakhstan. In practice, it will pay homage to the present tyrannies for as long as the oil flows.

You might say we have been here before. Oil has ever been a parent to realpolitik. The Middle East autocracies that Washington says it would now like to see turned into shining new democracies have been propped up for decades to sate the west's thirst for oil. Even after September 11, 2001, Saudi Arabia's status as the world's pre-eminent supplier means that its regime is treated with the gentlest of gloves. And when did you last hear a Western leader condemn political repression in Algeria? It must be a coincidence that Algeria has significant gas reserves. Competition, though, will intensify. Take your pick from the official forecasts -- most see demand for oil and gas rising by upwards of 50 per cent by 2030 -- and one conclusion is irresistible. Even at present prices, the demand for fossil fuels will fast outstrip available supplies. More importantly, we are witnessing a profound change in the nature of competition among consumers.

For all the occasional dislocations, the three decades after the first oil shock saw a fairly transparent bargaining process between suppliers and consumers. The Organization of Petroleum Exporting Countries, dominated by Saudi Arabia and its neighbors, represented the producers. Across the table sat the industrialized nations of the West. Both groups were relatively homogeneous. If finding production and price points that served a mutual interest was sometimes vexatious, it was more often relatively straightforward.

The emergence of China and India as the motors of rising demand changes everything. The interests of consumers are no longer obviously aligned. China's per capita oil consumption is only about one 25th of that of the U.S. Yet secure and rising energy supplies are vital to its rise as a global power. India, too, has more to lose than established Western powers from disruption to its supplies.

The threat now is of conflict between consumers as much as any stand-off with suppliers. The early signs are already visible in the explosion of Chinese diplomacy in Africa, the Middle East, and Latin America. Much of the West sees Iran as a threat. Sudan stands condemned for blatant human rights violations. Washington worries that Venezuela's leftist government is destabilizing Latin America. Yet Beijing looks at these countries through an entirely different lens. They are reliable guarantors of its energy needs.

There are more direct potential clashes. The disputed waters of the oil-rich East China sea are a dangerous flashpoint between Beijing and Tokyo. Mr. Putin is playing pipeline politics in Central and East Asia as well as in Europe. Iran is in dispute with its neighbors about the mapping of Caspian energy reserves. The great power conflicts of the late 19th and early 20th century suddenly seem eerily familiar. I have often heard it said that the market will eventually solve all these problems. Higher prices will ration demand and drive the innovation and conservation measures needed to reduce our dependency on oil and gas -- and in the process rescue us from climate change. It is a nice thought. Eventually, though, may well prove to be too late. Markets cannot second-guess power politics. Best to turn down the central heating again.

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