SHUGHART: Russia's bare-knuckle policy on oil

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COMMENTARY:

If President-elect Barack Obama and his top advisers learn nothing else from Russia's invasion and occupation of South Ossetia this summer it should be that Moscow aspires to be an energy superpower.

Russia already is the world's second-largest producer of oil, pumping nearly 10 million barrels a day, and is the largest supplier of natural gas. Like all energy-exporting countries, Russia benefited enormously from the run-up in prices over the last decade. Every $1 increase in the price of a barrel of oil transferred about $1 billion into Russia's state budget. As a result, Russian foreign exchange reserves grew from $12 billion in 1999 to $470 billion at the end of last year, a balance equaled only by such countries as China, India and the Middle East oil producers.

When its tanks rolled into Georgia, the Kremlin sent notice it intends to dominate the oil and natural gas resources of the former Soviet republics in the Caspian Sea basin, raising the threat of supply disruptions to Europe. That possibility could give Russia political leverage over Germany, the Czech Republic, Slovakia, Ukraine and other Central and East European countries that rely heavily on Russian fuels.

As rising oil prices strengthened the Kremlin's hand, Mr. Putin clamped down on Russian businessmen, most notably by prosecuting and imprisoning Yukos Oil Co. Chief Executive Officer Mikhail Khodorkovsky.

The company's assets were later sold at bargain-basement prices to state-owned enterprises, one of which - Gazprom - was headed by Dmitry Medvedev, Mr. Putin's handpicked successor as president.

Despite existing contracts with Western oil companies, the Kremlin voided exploration licenses held by ExxonMobil and Chevron, then forced Royal Dutch Shell to sell some of its holdings to Gazprom. Increasing the pressure, Russia then raised previously subsidized natural gas prices to Ukraine and Belarus, two important conduits for gas exports to the West.

The new Obama administration needs to realize Russia has a potential stranglehold on America's European allies and will play its energy card when it wants to: to block the further expansion of NATO, for example, or the EU.

Russia's next likely move, which could be delayed until the global economy starts picking up again, will be an attempt to orchestrate a global natural gas cartel patterned on the Organization of Petroleum Exporting Countries. About 15 gas-producing countries, led by Russia and Iran, met in 2004 and agreed to establish an "executive bureau" to coordinate "interests" in the global gas market.

As world demand for natural gas begins to outpace supply, incentives for collectively reducing production and increasing prices will strengthen.

For the United States, a combination of conservation, increased energy production and improvements in energy efficiency is the best defense against volatile oil and gas prices and Russian blackmail.

But congressional gridlock over energy policy - and lack of leadership from the White House - has blocked longer-term solutions.

While increasing domestic energy supplies by tapping proven oil and gas deposits in the Outer Continental Shelf, the mountain West and Alaska will help, the most important step the United States can take on the energy front is to use more coal and nuclear power.

America has a 250-year supply of coal, more plentiful on an energy-equivalent basis than the oil reserves of either Saudi Arabia or Russia.

The president-elect should re-examine his position on coal in particular. "Clean coal" is not an oxymoron. Building more coal-fired power plants that use new technologies to capture and store carbon dioxide emissions deep underground and converting coal into liquefied fuel for transportation are sensible policies.

Increasing our reliance on coal and nuclear power would free up natural gas for household and industrial uses and go a long way toward immunizing the United States from both OPEC and Russian blackmail.

William F. Shughart II is a senior fellow at the Independent Institute, Oakland, Calif. (www.independent.org) and Frederick A.P. Barnard Distinguished Professor of Economics at the University of Mississippi.