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Gazprom’s looming crisis

Nadejda M. Victor, Washington Post via St. Petersburg Times
Russia controls more than a quarter of the world’s gas reserves — more than any other country. Most of the known Russian reserves (about 80 percent) are in west Siberia and concentrated in a handful of giant and super-giant gas fields. Since the early 1970s the rate of discovery for these new fields has been declining. Moreover, output from the country’s mainstay super-giant fields is also steadily falling.

Huge investments are needed to replace this dwindling supply, and all the options for new production will prove costly and difficult. New fields in the far north and east of the country are distant from most of Russia’s people and export markets, requiring wholly new transport systems such as pipelines. Moreover, most of these fields are found in extremely harsh environments where it is technically and financially difficult to operate.

So far Gazprom has been able to forestall crisis. Economic stagnation across the former Soviet Union and Eastern Europe since 1990 dampened gas demand. Russia, which had a surplus at the time, sharply increased its gas exports and made contractual commitments that will remain in force for many years.

But following the long stagnation, Russia’s internal gas consumption is rising again as the economy expands. And new Russian policies to promote development of the country’s eastern regions will, in the next few years, require large new commitments to supply gas to that region (along with spending on railroads, airports and other infrastructure).

Even when the Russian economy was in the doldrums the country was notable as a large gas consumer because of its extremely inefficient energy system. Today Russia is the world’s second-largest gas user after the United States, although its economy is only one-twentieth the size of the U.S. economy.

Nadejda M. Victor is a research fellow at the Program on Energy and Sustainable Development at Stanford University. She is co-author of “Axis of Oil” and of a forthcoming comprehensive review of Russia’s gas pipelines. She contributed this comment to The Washington Post.
(11 April 2006)
Heading Out at TOD has commentary.

NATO and energy security
Paul Gallis, Congressional Research Service (CSR) (US Dept of State)
Summary: Energy security is becoming an issue of increasing importance to the United States and its European allies, as some energy producers are showing a tendency to use oil and gas as political leverage. Although most European allies believe that a market solution exists to ensure security of energy supplies, NATO has begun to discuss the issue as an allied concern. This report will be updated periodically

Energy as a Security Issue
Over the last several years, the view has grown that the power to ensure access to international energy resources has shifted away from energy consumers to energy producers. The growth of China and India as large consumers of energy, coupled with an inability to develop reliable and affordable alternatives to oil and natural gas, has led to this development.2 In December 2005-January 2006, when Russia dramatically raised the price of natural gas that it was supplying to Ukraine, many saw an effort to squeeze Ukraine politically and economically to secure Kiev within Russia’s orbit. Moscow’s effort also underscored the shift towards the ability of energy producers to exert pressure on countries dependent upon them for supplies.3 In addition, Russia’s actions made the issue of energy security a high-priority item on the European Union’s agenda.

The United States and its European allies have begun to discuss the appropriate institutions and policies for ensuring energy security.
(21 March 2006)

Governor: Go slow in fight on warming
He wants to protect industries while addressing global problem

Mark Martin, SF Chronicle
Gov. Arnold Schwarzenegger called Tuesday for California to become a national leader in combatting global warming but cautioned that the state should move slowly in imposing controls on industries that emit greenhouse gases, a step environmentalists argue is a priority.

“We could really scare the business community,” Schwarzenegger warned during a summit at San Francisco City Hall at which he called for programs to help companies cut the amount of carbon dioxide and other gases that scientists say cause global warming.

The governor’s comments caused one environmentalist to suggest Schwarzenegger was a “Jekyll and Hyde” on the issue. The matter could become the focus of a battle this year with Democrats, who are backing legislation, opposed by some big business groups, that calls for enacting emission limits on industry.

At the heart of the issue is whether California should use a so-called cap and trade system in which a government sets limits on the amount of carbon dioxide companies can emit. Companies emitting less than their limit could sell credits to businesses that emit more.

The system would, in essence, place a cost on emitting gases that most scientists believe are creating an unnatural heating of the Earth. Cap and trade has been enacted by 25 countries as part of the Kyoto Protocol on climate change.

Schwarzenegger said he thought California should start without caps.
(12 April 2006)
Related: LA Times.

IMF: high oil prices are worsening global trade imbalances

Elizabeth Price, Dow Jones via Schlumberger
WASHINGTON – Rising oil prices have magnified global trade imbalances, making the world economy more vulnerable to financial turmoil and higher inflation, the International Monetary Fund said Thursday.

In a portion of its latest World Economic Outlook published Thursday, the IMF again tries to understand the puzzle of how the U.S. continues to finance massive and growing trade deficits that for years economists have said are unsustainable. IMF economists look at the contribution oil imports have made to the U.S. trade deficit, and the impact on U.S. interest rates from so-called recycling of petrodollars. In another study, they examine the causes and sustainability of historically high levels of corporate savings in industrial countries.

“It is worth noting that external imbalances were apparent well before oil prices started to edge upwards in 1999, and certainly before oil prices reached their current peaks,” the IMF said. “That said, over the past two years higher oil prices account for one-half of the deterioration in the U.S. current account deficit.”
(13 April 2006)

Tame oil’s wild price ride with a tax

Henry Lee, Christian Science Monitor (commentary)
Volatile oil prices keep energy companies from investing in alternatives.

CAMBRIDGE, MASS. – With the onslaught of high oil prices, war in the Middle East, an increasingly bellicose Iran, and the aftermath of hurricane Katrina, energy security has reemerged as a major public policy priority.

We have been here before, and the responses from elected officials have been quite predictable: find scapegoats (usually the oil companies), demand subsidies for the energy technology of the month, and point out that the country lacks a coherent national energy policy.

Give it a few years, however, and the sense of urgency will fall in tandem with the price of oil and we’ll go back to business as usual. Presidents from Richard Nixon to Jimmy Carter to George W. Bush have all made similar pledges and yet progress in many of these areas over the past 30 years has been paltry at best. Why?

The answer is quite simple: Oil prices can rise rapidly and fall rapidly.

…The United States has avoided addressing its “addiction to oil” for 30 years. To continue to do so may be flirting with severe political and economic consequences. We need to get serious about the problem. This means creating a marketplace that is receptive to alternatives to our present oil addiction.

Alternative energy companies that will be making our future energy investments are inhibited by oil price volatility. Unless the US can induce these institutions to invest in new energy technologies, the country is doomed to live through a continuing cycle of oil spikes, economic dislocations, and energy insecurity. We have an opportunity to take a step toward reasserting control of the oil marketplace. We would be wise not to squander it.

Henry Lee is the director of the Environment and Natural Resources Program in the Belfer Center for Science and International Affairs at Harvard University’s Kennedy School of Government.
(13 April 2006)

Oil & commodities at record highs – but the bears are fighting back

Jérôme à Paris, European Tribune
A number of symbolic levels have been reached or breached in recent days on the commodity markets, with many predicting more to come (see below), but a number of voices are now fighting back and saying that this is not so significant, unlikely to last, or both. Let’s take a look at their arguments.
(13 April 2006)
Also posted at Daily Kos.

War fears and the price of oil

James Hamilton, Econbrowser
More talk this week of war with Iran, and the price of oil jumps right up. Maybe the two are related, and maybe not.

As war talk and oil prices both escalate, it’s easy to start thinking we’ve been here before. The graph at the right, taken from a recent paper by Justin Wolfers at the University of Pennsylvania and Eric Zitzewitz at Stanford, reminds us of what happened in 2002-03. The graph tracks the price of oil, experts’ assessments of the probability of war, and the probability of war as implied by the price of a contract that would pay $100 if Saddam were ousted by June 2003. Fast forward to 2006, with oil prices as shown in the graph above and talking heads discussing the possibility that the U.S. might use nuclear weapons against Iran, and it seems a bit too close to deja vu for comfort.

Except one detail– the prediction markets aren’t playing along with all the war talk this time
(10 April 2006)
Recommended by Prof. Goose at The Oil Drum, as one of several starting points for an Open Thread.