Thursday, October 21, 2004

Fear of the Bear
Yesterday the Washington Post published an editorial highlighting the growing influence of Russia on energy markets. It has surpassed Saudi Arabia as the world's largest oil producer and is well-positioned by geology and geography to be the world's number one natural gas supplier. At a time when Russia's commitment to democracy and markets is less clear than a few years ago, it's reasonable for this realization to cause some concern.

I'm not sure that I can dispel these worries entirely, but I'd like to point out a few mitigating facts. First, Russian oil represents this generation's chance--analogous to the North Sea and North Slope 25 years ago--to forestall the total dominance of the oil markets by the Middle East. It may be the last such opportunity, as geology increasingly becomes destiny in terms of the disproportionate share of the world's oil endowment held by the countries around the Persian Gulf. Kremlin politics could still truncate this opportunity, by scaring off the international investors that will be needed for it to reach its full potential in oil.

Russia's share of global natural gas reserves is even more impressive than in oil, legitimately earning it the title of the Saudi Arabia of gas. But it is important to understand that global natural gas development is at a very different point than for oil. Gas exploitation is a full generation behind oil exploitation, and the kind of end-game in which Russia's dominant gas reserve position becomes the trump card is many decades away. The challenge for today's gas developers is not a scarcity of world-scale gas reservoirs; rather it is connecting those reserves--in places like Australia, Indonesia, Alaska and Russia--to long-term customer commitments and the capital required to build LNG plants and ships or multi-thousand mile pipelines. This game is in its early days.

Ultimately I think it's wrong, or at least overly pessimistic, to view Russia as a potential OPEC-like monopolist in gas. Though its economy has a lot of catching up to do, it is hardly a mono-resource developing country. Its oil and gas reserves create a terrific opportunity to align and integrate with the rest of the developed world, including the rapidly developing economies of Asia, rather than holding them hostage to scarcity later. A large part of our diplomacy with Mr. Putin should focus on helping him to see the benefits of such a relationship.

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