Energy analyst Daniel Yergin believes Russia will become one of the top 10 US oil suppliers in five years. Reports from Russia say Moscow sees itself providing 10 per cent of the US’s needs. This trade has a double green signal from Washington and Moscow because of reasons other than mere profit.
Russian President Vladimir Putin is promoting his country as the US’s strategic petrol station, the energy policeman who’ll prevent the West from being mugged again by West Asia’s oil producers. This dovetails with a US desire to diversify its sources of oil away from the Persian Gulf.
Putin has gambled heavily on being able to strike a stable post-Cold War relationship with the US. He wants the first world to see Russia not as an invalid but as another Western nation a bit down on its luck. "Deal with us as a partner. Give us the same standard terms as anyone else," he said last year.
Putin’s problem has been that the US has tended to see Russia, whose economy shrank to the size of Switzerland’s and whose people seemed set on drinking themselves to extinction, more of a nuisance than an asset. The war against terrorism has helped Russia immeasurably. But the real glue of a long-term bonding, Putin believes, will be in persuading the US to take an energy insurance policy with Russia.
It’s hardly a one-way street.
As the US’s energy partner, Moscow will automatically earn itself a seat at the high table of world politics. Russia has set up an energy security dialogue within the Group of Eight. By promising to provide energy security to the G-8, he has already elevated Russia from the status of the poor uncle at the rich nations’ club. Jane’s predicts: "In any future crisis…the Russians will step in to calm down any oil panic."
Also, being thick with the world’s largest oil consumer is good business sense for a country which daily now pumps out more crude than Saudi Arabia and whose government’s finances are one-third dependent on oil-based revenue sources.
President George W. Bush came to power determined to pursue an energy policy of "security through diversity". It helped that Vice-President Dick Cheney, prime mover in the Bush administration, comes from the oil industry. Bush said in May last year, "Overdependence on any one source of energy, especially a foreign one, leaves us vulnerable to price shocks, supply interruptions, and in the worst case, blackmail." A new energy policy sought to reduce a dangerous and increasing US dependence on Persian Gulf petrol by proposing, among other things, that the US buy oil from less volatile parts of the world.
September 11 added further urgency to the policy. The chief financier of Islamic terror was Saudi Arabia. Riyadh was unwilling to stop funding jihad for fear of antagonizing the country’s Islamic clergy and undermining the monarchy’s legitimacy.
This was Washington’s quandary: it was waging war against terrorists whose money source was also the guarantor of the US economy’s fuel supplies.
The US has been trying hard to wean itself off the Saudis. It doesn’t help that the top ten oil producers include Iraq, Iran, Venezuela and Libya, all countries not known for their closeness to the US.
In its search for an alternative, Washington does not wish to become a fossil fuel slave to another country. It wants to replace the monopoly with a multitude. It has been helping African nations from Nigeria to Chad to Angola ramp up their production. It has even stepped up involvement with the Colombian civil war to secure that country’s little-known petroleum assets. It has also not given up on its mildly absurd plans to tap the black riches of the Caspian region in a way that cuts out Russia and Iran.
Oil is also a key reasons for the Bush administration’s desire to overthrow Saddam Hussein. If Iraq achieves its full oil potential – some experts believe it can match Saudi Arabia – the world would be awash in oil for a decade.
But no country has received as much US succour as Russia. Scientists of the US Geological Survey are prospecting Russia’s Arctic shoreline at the US taxpayers’ expense. US aid is helping Russia build pipelines and ports to smoothen the way for Russian oil exports. A joint effort is being made to build a US dedicated oil terminal at the north Russian port of Murmansk. US Energy Secretary Spencer Abraham – best known among Indians as the US Senate’s most avid proponent of H-1B visas – has publicly said the US will seek to "increase Russia’s role in oil markets."
Putin has been cautious in asserting Russia as a petroleum power. He knows Russia overtook the Saudis in oil production largely because Riyadh deliberately cut back to keep world petrol prices up. Compare the reserves of the two countries – the Saudis sit on 262 billion barrels, the Russians on 50 billion barrels – and its clear who is still number one.
Directly challenge the Saudis and their little club, the Organization of Petroleum Exporting Countries, and Russia could be seriously bruised. Riyadh is especially touchy about attempts to dethrone it as the US’s number one petroleum supplier, a position it sees as vital to the kingdom’s security. In 1996-97 Venezuela did exactly that. A furious Saudi Arabia opened up its spigots to full flow, drowning the world in petrol and triggering the 1998 oil price collapse.
Moscow was eyeball to eyeball with OPEC early this year. When OPEC reduced its output to raise prices, Russia kept increasing production. An angry Saudi-led OPEC threatened Moscow with a price war. Putin made soothing noises and a cosmetic cut of 150,000 barrels. Russia’s deputy head of government administration, Alexei Volin, said, "Russia has not declared price war on anyone and is not interested in such a war."
Moscow has already assured Riyadh it has no desire to become the US’s number one oil supplier. It will settle for being number two, just a percentage point or two behind the Saudis.
However, more honest sentiments were put out by Putin’s aides who publicly said OPEC was a dying institution. There were plenty of media reports that Russia’s cash-rich oil giants had quietly told Moscow they were confident about taking on the Saudis in a fight. That outside experts believed they could say this with any credibility was a remarkable sign of how well Russia had used oil to revive its fortunes.
Putin can be suitably satisfied with what he has accomplished so far.
He knows Russia is capable of much more. The Soviet Union once matched Saudi Arabia when it produced 12.5 millions of barrels per day. Russia today produces only seven million barrels. Given time, enough capital and infusions of Western technology, Russia will be able to rebuild the broken down Soviet energy infrastructure it has inherited. It is already increasing production by half a million barrels a year, faster than any other country in the world.
More importantly, Putin is leveraging Russia’s oil industry to gain geopolitical influence around the world. He is accomplishing this by opening up the Russian oil industry to foreign investment – even India has invested in oilfields off Siberia. He is also encouraging Russia’s oil companies to invest overseas, for example building pipelines across Central Asia, China and Europe.
The Saudis, normally aggressive in trying to woo US capital, have moved in the opposite direction after September 11 with increasing opposition in Riyadh to increased Western investment in their oilfields. This has only further reduced their influence in Washington. Putin understands what the Saudis have unlearned – a global player trades domestic autonomy for international influence. And this goes double in the energy business.
Right now diversification is the name of the game in the energy security business.
Even insular India has begun investing in petroleum production, pipelines and buying prospecting rights in countries outside West Asia like Sudan, Kazakhstan, Algeria and Vietnam. The logic is simple enough. As India’s economy grows, so will its oil imports. It will be better able to guarantee such a supply if it is at least a part-owner of oil production centres in places around the world. It is also trying to draw foreign investment to Indian oilfields. It is Putin’s strategy, though on a much smaller scale.