Pipeline Politics
| Wed Jan. 7, 2009 1:27 PM PST
PIPELINE POLITICS....Russia wants to hike the price that Ukraine pays for its natural gas. Ukraine doesn't want to pay. Russia says Ukraine is siphoning off gas destined for Europe. Ukraine says that's a lie. 
So Russia has closed the taps on its pipeline and no gas is flowing to anyone. Robert Farley takes a stab a figuring out who's really at fault in this spat:
On balance (and at risk of being once again denounced as a Kremlin stooge) I'm rather less sympathetic to the Ukrainian case; of course accepting a discount from a Russian national gas concern was going to give Russia influence over Ukraine. That's the price of doing business. I'm singularly uncompelled by the notion that Russia supplying energy to Europe gives the Russians some kind of undue, ominous influence over European affairs, any more than the folks down at Chipotle have ominous influence over me through their control of burrito supplies. Market transactions inevitably create short term dependence, but of course that goes both ways; Russia can interfere with supply only at significant cost to Russia.
Even at the higher prices Russia wants to charge Ukraine, the Ukranians would still be getting gas at a discount. And Ukraine's previous contract only ran through the end of the year. So I think I agree with Farley: although regional power politics are obviously behind Russia's actions, this is still primarily a commercial issue. Both Gazprom and Ukraine are in pretty serious economic straits right now, and neither one wants to back down. It's more a routine dispute over money than anything else.
UPDATE: In the Financial Times, Jérôme Guillet and John Evans provide more background. Nickel version: Russia and Ukraine have been fighting this exact same fight for a long time and they both know that neither side can do without the other. So a few years ago Gazprom "solved" its Ukraine problem by privatizing much of its gas trade: customers would pay less for their gas, but they'd pay a third-party supplier who was supposedly unrelated to either Ukrainian gas authorities or Gazprom:
Political infighting in Ukraine can largely be understood by the struggle to be the Ukrainian counterparty to the trade. (It is no coincidence that Yulia Tymoshenko, the prime minister, made her fortune in gas trading in the 1990s and that Viktor Yanukovich, the pro-Russia opposition leader, represents some of the largest heavy industrial gas buyers in eastern Ukraine.) In Russia, similarly, both the Kremlin and Gazprom are rife with infighting between shifting coalitions.
So while the world focuses on the predictable brinkmanship between Ukraine and Russia, the real fight over the share-out is taking place more discreetly between a few oligarchs in Moscow and Kiev. This is perhaps the whole purpose of the noisy puppet show. Worries about Russia or Gazprom using the "gas weapon" against Europe are misplaced. In their official capacity, both are keenly aware of their absolute dependency on exports to Europe for a huge share of the country's income, and on the need for stable, reliable, long-term relationships to finance the investments needed in gas infrastructure.
So it really is a routine dispute over money, it's just that the dispute isn't really between Russia and Ukraine. It's between a small group of rich Russians and a small group of rich Ukrainians. You can read about this in even more gruesome detail here.
Continues Below
Continued From Above
Comments
I really recommend the treatment that Jerome a Paris gives this issue over at The Oil Drum.
Highlights include the fact that he claims (after what seems a fair amount of trying) to not have ever been able to find any evidence that Ukraine has ever paid for Russian gas, and the history of Russian gas infrastructure basically having found itself inside the Ukraine after the Soviet breakup.
His conclusion is that private interests in Russian and Ukraine are doing this kabuki just to obfuscate and enhance their own profit making.
Kevin quoted Robert Farley: "I'm singularly uncompelled by the notion that Russia supplying energy to Europe gives the Russians some kind of undue, ominous influence over European affairs, any more than the folks down at Chipotle have ominous influence over me through their control of burrito supplies."
I sure hope you realize just how fatuous that statement is.
According to AP, Europe as a whole receives 25 percent of its natural gas from Russia, 80 percent of which passes through Ukraine. For individual countries Russian natural gas is even more important: Germany gets 40 percent of its natural gas from Russia, Serbia gets 90 percent. These supplies have now been abruptly cut off in the middle of the winter heating season.
How much of Pundit Farley's food supply does Chipotle control? More to the point, how much of America's food supply does Chipotle control?
If Chipotle controlled 25 to 90 percent of the US food supply and suddenly cut off that supply, with no replacement for that 25 to 90 percent of America's food supply available, would he be so smug?
I'm singularly uncompelled by the notion that Russia supplying energy to Europe gives the Russians some kind of undue, ominous influence over European affairs, any more than the folks down at Chipotle have ominous influence over me through their control of burrito supplies.
If XYZ burrito joint cut off my salsa supply, I go to the taco truck or the Na'an and Curry down the road or whatever. My opportunity cost is the 5 minutes to get my fat ass there.
But given that energy infrastructure has a 20-30 year lifetime and takes 1-3 years to build a new power plant, if I've dumped a boatload of bucks into Natural Gas Combined Cycle Plants and my supply gets screwed up, I'm SOL for the supply interruption. If I want to avoid being held up by supply interruptions, I have to build a LNG terminals and storage to create a strategic reserve or write off the previous investment in NGCC and start building other power plants (which would probably be coal-based)
As NGCC is the lowest CO2/MWh option for fossil fuels, the EU reverting to coal for power and heat is not attractive for environmental reasons also.
In the long run, Russia using its energy muscles overtly will hurt Russia most, just as Bush using the U.S. military muscle overtly hurt the U.S. most, but there'll still be a lot of collateral damage in the meantime.
"routine dispute over money"
This sort of thing will become increasingly "routine" as long as we continue to have an energy economy based on extracting, selling, buying and burning limited, dwindling supplies of costly, destructive fossil fuels.
The solution is to move rapidly beyond a fuel-based energy economy to a new energy economy based on harvesting limitless, abundant, ubiquitous, FREE wind and solar energy.
The "energy giants" of the future won't be corporations like ExxonMobil and Gazprom that profit from mining, refining and selling fuel. They will be corporations that manufacture and sell the technology for harvesting free wind and solar energy. They will more closely resemble Intel than ExxonMobil.
And the way things are going now, they will be predominantly Chinese.
Frankly, I prefer to think in a more direct way. California's electrical companies deliberately shut down plants to raise their prices-Their bosses were actually taped laughing at the plight of retirees. Then there is the fact that the regulatory agencies for the utilities are State but the State taxes go up with the charges of the utility companies-not a good way to control utilities! We are entering an era where those who control the sources of enerhy basically control the world economies-put that in your little dispute about money!
Submitted by China mobile phone (not verified) on Wed Jan. 7, 2009 5:13 PM PST.
If Chipotle controlled 25 to 90 percent of the US food supply and suddenly cut off that supply, with no replacement for that 25 to 90 percent of America's food supply available, would he be so smug?
So it really is a routine dispute over money, it's just that the dispute isn't really between Russia and Ukraine. It's between a small group of rich Russians and a small group of rich Ukrainians.
That sums up all wars fought in history, except the rich folks convince the public to "support the troops" and send other people to do their fighting for them.
Maybe it's about "a few oligarchs" and their money.
But with Ukraine wanting to join NATO and eventually kick Russia out of its Black Sea naval base (which it could then rent to the US), Georgia starting a war against Russia with western and Ukrainian approval, and Bush placing missiles in Poland supposedly to to defend the US from Iran, there is a lot one has to ignore to conclude that it's just about rich people fighting for the cash. It wouldn't be surprising if Russia is trying to remind Europe (and Ukraine) that it holds some cards it's willing to use.
