The price of crude oil has fallen in recent weeks. But markets remain nervous that growing tensions with Iran over its refusal to suspend its nuclear enrichment programme, the chaotic state of Nigeria’s economy and further provocations by president Hugo Chávez in Venezuela could send the price rocketing into the $80 to $100 a barrel range. Were such prices to be sustained, financial markets would be hit and global growth would slow significantly this year.
But there is another risk to energy prices that is much closer to home: the coming energy confrontation between Russia and Europe to its west.
On the surface, relations remain cordial. Russia holds the G8 chairmanship this year and president Vladimir Putin will host the world’s most powerful leaders at a summit in St Petersburg this summer. Russia’s agreement to refer Iran to the UN Security Council for its nuclear activities was received with joy in the west.
How Europe depends on Russia for energy:
Russian piped natural gas imports as a proportion of total gas imports, 2004 |
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| Source: BP |
Behind the scenes, though, something quite different is taking place. The confrontation between Ukraine and Russia over gas supplies in early January has given western Europe a shock. The result will be a confrontation over energy resources, as the west seeks to reduce its dependence on Russia for gas and oil.
Western Europe relies on Russian natural gas for a quarter of its energy needs. Gazprom, the Russian monopoly gas supplier, is largely state-owned and led by people who are close to Putin. In effect, it is a branch of the Russian government.
If current trends continue, western Europe’s dependency on Russian energy products will grow very fast. The European Commission forecasts that import dependence could grow to nearly 70% of overall EU energy consumption by 2030 and 90% for specific fuels.
Focus on Germany
Russia has for several years courted Germany, using energy as a lever. The Russians know that if they build an alliance with Germany they will be able to dominate the rest of Europe indirectly. During the time of former chancellor Gerhard Schröder, this alliance flourished.
The Russians are building a special gas pipeline through the Baltic Sea that not only delivers gas directly to Germany but also bypasses all other potential consumers, making Germany the hub of future energy exports.
Russian spies have infiltrated a variety of German commercial enterprises associated with the energy trade. And Russian money is also buying political favours: Schröder’s decision to join the board of the Russian-German gas company that will run the Baltic pipeline is but the most spectacular example. However, with the chancellor’s office now filled by Angela Merkel, who was raised in the Soviet satellite state of East Germany, the previously cosy relationship with Russia and Putin is over.
Western Europe is now trying to adopt a new strategy on energy that will bring it into a more open confrontation with Russia. The EU has agreed to hold a special summit on this topic in March.
The touchiest subject is nuclear energy. France, which kicked off the debate, is unique in Europe in relying on nuclear energy for 70% of its electricity needs. In Germany, Scandinavia and the UK, however, the possibility of expanding nuclear generation is a political hot potato because of public fears about safety.
None of these measures is likely to reduce dependency on Russian energy supplies in the near future. But direct approaches to energy policy are not the only measure that will be taken; political moves are just as important. The Americans are already beginning to discuss the possibility of admitting Ukraine into the North Atlantic Treaty Organization. This will be an event of monumental proportions, signifying that Russia has lost its influence over Ukraine for good.
Georgia is important as a crossroad of some pipelines, and Azerbaijan is a significant oil producer. Support to these countries might even entail the stationing of US and western European troops to prevent them from collapsing under Moscow’s pressure. And western European countries will encourage central Asian republics to reroute their pipelines through the Caspian and Black Sea, thereby bypassing Russian territory.
Western Europe’s strategy is therefore two-pronged: active measures to reduce energy dependency, coupled with political measures designed to tell Moscow that the more it tries to put the squeeze on the west, the higher the price Moscow itself will have to pay for this.
Nobody knows if this will work. But there is a feeling in Europe that there is no alternative. Either way, we can predict with a high degree of certainty that the next few years will be full of tension in Russia’s relations with western Europe, and that oil and gas will dominate these.