Vladimir Putin's plan to form an OPEC-style natural-gas cartel sounds terrifying. It isn't.

Vladimir Putin's plan to form an OPEC-style natural-gas cartel sounds terrifying. It isn't.

Vladimir Putin's plan to form an OPEC-style natural-gas cartel sounds terrifying. It isn't.

Moneybox
Commentary about business and finance.
Feb. 7 2007 5:51 PM

What if Putin Ran OPEC?

The Russian president's plan to form a natural-gas cartel sounds terrifying. It isn't.

Illustration by Mark Alan Stamaty. Click image to expand.

Last week, Russian President Vladimir Putin sent chills through Western Europe when he discussed the possibility of forming a gas-producers' association with countries like Libya and Iran. "A gas OPEC is an interesting idea. We will think about it," he said. "We are not going to set up a cartel. But it would be correct to co-ordinate our activities with an eye to the solution of the main goal of unconditionally and securely supplying the main consumers of energy resources."

Uh-oh!

Advertisement

Here is a government that already uses its control of vital energy supplies as a weapon against its neighbors proposing to join forces with a charter member of the Axis of Evil—the better to intimidate rival nations all over the world.

Russia's natural-gas supplies are one of its most powerful economic resources. Natural gas, which burns cleaner than coal, is a fuel of the future. According to the Energy Information Administration's excellent data on natural gas, Russia alone accounted for 22.7 percent of global natural-gas production in 2004, compared with 19 percent for the United States. Were Russia to form a cartel with Iran, Egypt, Libya, Saudi Arabia, the United Arab Emirates, Qatar, and Algeria, they'd control a combined 35 percent of 2004 production.

But even though Putin's pipelines feed the growing European thirst for gas, we don't have much to fear from a Putin-led gas cartel. In fact, a gas cartel might even be good news for America. While energy cartels like OPEC can cause short-term dislocations, they actually have a pretty sad record of controlling prices and bending the world to their whims.

OPEC is like the Star Wars bar scene of geopolitics—a collection of autocrats, despots, kleptocrats, and monarchies skilled at duplicity and prone to invading each other. Cartels seek to influence prices by setting production quotas. But autocratic countries frequently find reasons to cheat, producing more when prices are high, for example. A gas cartel would be just as fractious. The notion that Vladimir Putin, Mahmoud Ahmadinejad, and Muyammar Qaddafi would reliably stick to the terms of a cartel pact is laughable.

Advertisement

What's more, the natural-gas cartel would find its power limited by large producers who wouldn't join. In 2004, the United States, Canada, the Netherlands, Norway, and the United Kingdom—democratic, liberal, Western countries all—collectively accounted for 35 percent of total global production. The fear and annoyance induced by a Putin cartel would induce Western gas producers to invest in production at home, as Norway is already doing, or goad the United States to make greater efforts to tap into large domestic reserves by opening up new areas for exploration.

More importantly, cartel efforts to manipulate the supply and price of natural gas would provide more incentives for consumers to reduce use and to redouble already frenzied efforts to develop alternative sources of energy: ethanol, solar, coal gasification, and nuclear energy. In Germany, leaders fretting over the reliance upon Russia for natural gas and oil are reconsidering the nation's move to phase out nuclear energy. Periods of sustained higher gas prices—combined with growing concern about the environmental, economic, and geopolitical costs of fossil fuels—have stimulated changes in policy and behavior. The International Energy Agency last month reported that the 30 members of the Organization for Economic Cooperation and Development slashed their collective consumption of oil by 0.6 percent in 2006—the first decline in 206 years.

Finally, the hyperdynamic and constantly changing economic climate makes the enterprise of controlling commodity prices a fool's errand. Over the past decade, OPEC has done a poor job of keeping oil prices where it wants them to be, as shown by this long-term chart of Brent Crude Oil. OPEC didn't want $10-per-barrel petroleum in 1999 any more than it wanted $70-per-barrel petroleum in 2006. And yet factors far beyond the control of OPEC governments conspired to move prices dramatically. The same factors that have wreaked havoc with the price of oil would presumably affect the price of natural gas: the rise of China and India, the advent of giant hedge funds speculating in the commodity, a recession in the United States, terrorist attacks, and war in the Middle East. If Putin is bent on rebuilding a Russian-led alliance that can stick it to the West, he's going to have to come up with something better than a natural-gas cartel.