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Frack you, Putin

By   /  January 20, 2015  /  No Comments

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Russia is a net exporter of oil, with mineral fuels comprising almost 60% of Russia’s dollar value gained from exports.  This dependence on one export product, while lucrative in the short term, creates the danger of a drastic reversal of fortunes should market forces cause a sharp decline in price.  Ordinarily, a cut in revenue might lead to a corresponding cut in spending that, while causing domestic unease, should have only a marginal effect on relations with neighboring countries.  Ordinary is seldom a descriptor used when discussing Russia and its charismatic leader.  With Russia’s expansionist behavior, as shown in recent excursions into Georgia, Crimea, and the Ukraine, President Vladimir Putin has shown a complete disregard for international outcry.  Those countries that do express token outrage are strangely quiet when talk of sanctions arises.  How do you impose retribution on the major supplier of your own imported energy needs?

Putin has invested a great deal of time and money capitalizing on Russia’s mineral fuel.  He has recognized that additional pipelines would facilitate the export of natural gas, but also give him another avenue to wield influence.  To this end, Putin developed the Nord Stream Pipeline under the Baltic Sea early in his presidency. It was completed in 2011.  Construction of the South Stream pipeline began in 2012, but Putin canceled the project in December 2014 because of protracted disputes with the European partners and insufficient funds.  Debate within the Russian energy industry reflects doubt that the South Stream pipeline was ever a good business decision.  Talks are now in progress regarding the development of a pipeline to Turkey, the second largest importer of gas in the region, and thus bypassing the Ukraine.

Using energy as a lever to amass or project power and influence is hardly a new phenomenon.  The Arab petrostates have until recently held a tight rein, via OPEC, on world oil prices by using joint restraint to inhibit supply.  This steady infusion of petrol dollars has allowed these member states to essentially buy security and maintain control of power.  Putin may not have invented the club, but he was certainly quick to brandish it.

In 2009, then Prime Minister Putin slashed the amount of gas it exported to Europe as part of an energy war over payments and prices.  Putin claimed that its goal was to force the Ukraine to pay a fair price for the gas it consumes.  The Ukraine responded by simply taking the gas it needed from the pipeline and rationing the remainder of the gas to Croatia, the Czech Republic, Greece, Hungary, Poland, Romania, and Slovakia.  Gas imports in Britain increased as a result of Putin’s decision, demonstrating how much Europe relies on Russia for energy.  More recently, President Putin used energy as a weapon once again when it withheld gas from the Ukraine in June 2014.  In the ongoing conflict between the government in Kiev and the Russian rebels in the east, Ukraine again withheld payment for Russian gas, causing a complete shut-off.

Today we have a new dynamic in play.  Oil prices have plummeted worldwide.  Dropping prices are the mixed result of entrepreneurs developing the technology to access oil and increased drilling on private property.  Additionally, when the world economy slows, less energy is consumed.  The combination of increased production and exploration, the slowed economy, mild winters, and Saudi Arabia’s decision not to cut production has drastically slashed oil prices.  There is some debate as to the Saudi’s intentions, but the end result is that cheaper oil is curtailing Putin’s finances.  One way to continue to ensure cheap oil would be for the United States to open the Keystone XL pipeline and/or develop its own tar sands, along with more development on public land.

As we speak, Congress is taking action to wrest control of the Keystone XL pipeline from the Executive Branch.  The House passed a bill in November that would direct the federal government to move forward on the Keystone XL pipeline.  U.S. oil production in 2013 was at its highest in 31 years as a result of fracking and horizontal drilling.  Opening Keystone XL will allow the United States to continue to drive down oil prices.  On January 12, the Senate voted to take up the bill forcing approval of Keystone.  The bill is expected to pass through the Senate easily, but will likely be vetoed by President Obama.  If the Senate were to gather enough support for the bill, it could override Obama’s veto with a supermajority.

Crashing prices have curtailed Putin’s cash flow significantly.  Russia, the world’s largest producer of oil, can no longer rely on its oil revenues in the face of European and U.S. sanctions.  Russia’s economy hinges almost entirely on energy, with few other sources of major income.   If low oil prices continue, Russia will have a hard time making it past 2016 without making major spending cuts.  Witnessing the effect that lower oil prices are having on Russia’s ability to project power and denying the possibility that increased production, coupled with decreased consumption, are causing this price decrease seems naïve, if not illogical.  Putin has outrun his banker and the best way to cut him off is to either deepen the price cuts, lengthen the period of price cuts, or both.  Would a concerted effort to maintain lower prices lead to at least a hampered Putin, or even another regime change?  Glasnost II?


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