- The Washington Times - Saturday, July 15, 2006

After he left the KGB in the early 1990s, Vladimir Putin earned an advanced degree in economics from a mining institute in St. Petersburg, where this weekend, as president of Russia, he is hosting the Group of Eight (G-8) summit under the theme of “energy security.” He titled his dissertation “The Strategic Planning of Regional Resources Under the Formation of Market Forces.” In 1999, before then-Russian President Boris Yeltsin elevated Mr. Putin to be prime minister, the still-obscure apparatchik published an article in an equally obscure academic journal forcefully arguing that “Russia’s natural-resource potential defines its special place among industrialized countries.” Those resources, particularly Russia’s prodigious endowments of oil and natural gas, had the power to enable the then-prostrate, virtually bankrupt Russia to “regain its former might.”

In April 2005, delivering the annual state-of-the-nation address during his second four-year term as president, a sufficiently emboldened Putin ominously declared that “the collapse of the Soviet Union was the greatest geopolitical catastrophe of the century.” Much had changed during the intervening six years. The price of oil had increased by more than 400 percent, rising from less than $10 per barrel in early 1999 to $50 in April 2005. Meanwhile, Russian oil output increased by 50 percent, rising from 6 million to 9 million barrels per day. On Jan. 1 of this year, Mr. Putin shut off natural-gas supplies to Ukraine, formerly the Soviet Union’s second-largest republic, after Ukraine refused to cede effective control of the trans-Ukrainian pipeline through which Russian gas flows to the European Union. Russian pressure worked. While the price Ukraine would pay for gas increased only 90 percent, compared to the 400 percent increase Russia sought, the new price was guaranteed for only a few months. However, Russia achieved its strategic goal of obtaining rock-bottom transit rates for its EU-bound gas for the next 25 years.

These strong-arm tactics prompted Vice President Dick Cheney this spring to warn Russia about “intimidation or blackmail, either by supply manipulation or attempts to monopolize transportation.” The warning fell on deaf ears. Indeed, in 1999, while Mr. Putin was maneuvering to succeed President Yeltsin, newly elected Venezuelan President Hugo Chavez personally resuscitated a comatose OPEC by demonstrating how output restrictions could raise prices. Russia has helped to keep the world oil market extremely tight over the past 18 months by significantly reducing the rate of increase of its oil output. Over three years (2000-2002), Russian output increased by 1.33 million barrels per day (the average annual increase was about 450,000 barrels per day).

Over the next two years (2003-2004), output increased 1.4 million barrels per day (the average annual increase was 700,000 barrels per day). Russian oil output increased by only 260,000 barrels per day last year. Prices continued to soar. The Commerce Department reported last week that America’s petroleum-import bill reached a record $28 billion in May (an annual rate of nearly $350 billion); in May petroleum imports averaged a near-record-level 14 million barrels per day. Meanwhile, the NYMEX price for oil closed at $78.40 per barrel Friday, nearly eight times its 1998 floor price.

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