- The Washington Times - Thursday, February 22, 2007

Having characterized the collapse of the Soviet Union as “the greatest geopolitical catastrophe of the 20th century,” Russian President Vladimir Putin has spent the first years of the 21st century desperately seeking to re-establish the great-power status of what remains. Riding the oil wave created by a sustained 500 percent price increase since 1998 and 60 percent increase in oil production, Mr. Putin now seems to be setting the stage in order to play the biggest wild card in the Russian deck: the formation of an OPEC-style cartel for natural gas.

The largest nuclear-weapons arsenal in the world could not prevent the Soviet Union from imploding 15 years ago. Notwithstanding the occasional saber-rattling, Mr. Putin understands that the second most powerful arsenal in the world today has proved utterly inadequate in reclaiming for Russia the bilateral superpower status that the Soviet Union enjoyed before its political, economic, geographic, moral and social bankruptcy in 1991. Given the product-quality demands, international productivity standards and the cost constraints that dominate globalized, high-value-added manufacturing today, Mr. Putin also knows that Russia during his lifetime has no chance competing on the economic front with Europe, Japan, China and the United States. He is, however, smart enough to understand that Russia’s short-, medium- and long-term absolute advantage lies in energy. If Russia is to regain its lost status, it will be through oil and gas. He seems to be as ruthless as he is determined to exploit this advantage for all that it is worth.

In July 1998, one month before Russia’s economic meltdown (which featured a bond default, a banking crisis and a collapsing currency), President Yeltsin appointed Mr. Putin to be the head of the FSB, the successor agency to the KGB, where he had previously served for more than 15 years. That same year, the world price of oil fell below $10 per barrel, and Russia’s oil output averaged less than six million barrels per day (compared to peak Soviet output of 12 million barrels per day in the mid-1980s). Since 1998, as OPEC first regained control of the market by slicing output and then enjoyed a demand-driven bonanza, the spot price of oil steadily climbed, briefly exceeding $75 per barrel last year and generally remaining above $55 ever since. Meanwhile, Russian output jumped by nearly 60 percent, exceeding 9.25 million barrels per day during the second half of last year and making Russia the world’s top producer.

Now Mr. Putin has been making noises about establishing a cartel for natural gas. According to the authoritative estimate of the trade publication, World Oil, Russia has nearly 2,400 trillion cubic feet (tcf) of natural-gas reserves. Known as “the Saudi Arabia of natural gas,” Russia has more than a third of the world’s 7,000 tcf of gas reserves. At nearly 1,000 tcf, Iran’s gas reserves are the world’s second largest, closely followed by Qatar’s 900 tcf. These three nations alone possess 60 percent of the world’s gas reserves. Adding in Saudi Arabia (240 tcf) and the United Arab Emirates (200 tcf) brings the five-nation total to two-thirds of world reserves.

At his annual news conference in the Kremlin last month, Mr. Putin said, “The idea of a gas OPEC is interesting. We will think about it.” Also in January, Iran’s supreme leader, Ayatollah Ali Khamenei, proposed creating a gas cartel during talks in Iran with Igor Ivanov, the head of Russia’s Security Council. Earlier this month, Mr. Putin visited Saudi Arabia and Qatar, where the subject of a gas cartel featured prominently in discussions.

Skeptics have listed lots of reasons why a natural-gas cartel would be difficult to establish. Most of those reasons, which we shall address in a subsequent editorial, apply to the short term. It’s worth recalling that OPEC, the oil cartel, was created in 1960, 13 years before it finally flexed its muscles. Mr. Putin, a two-term president who constitutionally must leave office for at least one four-year term before becoming eligible to run again, is widely expected to become the boss of Gazprom, Russia’s natural-gas monopoly, when his second term ends next year. It is fair to say that the 54-year-old martial-arts expert (he is a black belt in judo) plans to play the geopolitical game over the long term.

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