Putin's Energy Strategy

The Great Multi-dimensional Chess Game of Democracy versus Energy is in full sway, and the EU and the United States are in danger of being check-mated before they even fully realize they are in the game, let alone understand its rules. The view from the other side - led by Russia but joined by Iran, Venezuela, Nigeria and, increasingly, Algeria and even Norway (to name just a few), must be laughable as they watch the major free economies of the world flail about as if they were playing blindfolded.

Part of the problem may be that US leadership, in the persons of President Bush and Vice President Cheney, have spent real time in the private sector of the U.S. energy industry. They believe they know this game. It could be a case of a little knowledge being a dangerous thing, however. They have seen the problem as mainly one of supply of oil. Their answer, as became evident in the now infamous speech that Cheney delivered in Vilnius, Lithuania, is to chastise Putin for backing away from democratic freedoms, and to cozy up to leaders such as Kazakhstan's Nursultan Nazarbayev or Azerbaijan's Ilham Aliev, neither of whom has professed to run democracies in the first place, but who also control much of the world's supply of fossil fuels. Cheney understandably wants to head off a situation whereby Russia controls all of the fossil fuels heading west out of Central Asia; the question is, at what price to the freedom of millions of Central Asians?

Such inconsistency is not lost by the "other side" in this game. Putin is proceeding confidently along the path of securing ownership of energy exports from both Kazakhstan and Turkmenistan. In other words, he believes (knows?) that Nazarbaev will cooperate with the US to achieve some near term goals, but in the end, he will turn his back on the US and do whatever Putin asks. Playing ball with the Kremlin is better in the long run than having to listen to the continued nattering of Western leaders about what is, for him, all this democracy baloney.

Russia's Putin compensates for his lack of private sector background in the energy industry with a doctorate in economics and authorship of academic articles such as, "Mineral Natural Resources in the Strategy for Development of the Russian Economy". He has a good theoretical command of the uses and (by Western standards) abuses of the power of controlling energy supplies. In his case, effective control of 5% of the world's oil and, even more importantly, effective control of more than a quarter of the world's current gas reserves, translates into a relatively cheap ticket to more or less rule the world in a way that would make Stalin drool. No Russian troops are placed in harm's way, there is no costly arms race, no trains full of political prisoners heading for the gulag, and, in fact, Russian citizens are regaining their national pride as they watch Putin out-maneuver the Western powers.

Furthermore, while Russian coffers are filling up, Western coffers are emptying (Russia's "Stabilization Fund" set up to collect proceeds from the oil and gas windfall, is approaching $70 billion). Putin intends to float the ruble and introduce its use in international fossil fuel transactions. Depending upon the extent to which such a strategy is realized, the US dollar could be replaced as the world's reserve currency, leaving the US with its current astronomical debt and too few buyers who want this debt, thus reducing the US to the status of a banana republic. Meanwhile, as Putin rolls out his master plan, the Russian people largely overlook the fact that he has slowly but surely set back the clock on democratic reforms, from independent media to free elections, put in motion by his predecessor, Boris Yeltsin.

The Western powers have had plenty of time to plan and implement appropriate defensive strategies. The present energy crisis, which will continue for at least the next 3-4 decades even if the US and the EU immediately elected and appointed their most brilliant leaders capable of dealing with the crisis in a comprehensive way, began with the OPEC Cartel in 1973-4. OPEC ruptured a long-standing sweetheart deal for what were then the world's major oil companies who had determined decades earlier that a "fair" world market price to suppliers of crude oil was $2 per barrel. OPEC stood this buyer's market on its head in 1973-4 and said the price of oil is what we, the owner's and sellers of the oil, say it is. Well, almost.

Even OPEC at the time had some difficulties getting its act together, but the initial scare caused the US Congress to conclude that dependency on foreign oil was a national security, as well as economic, risk. Congress passed a remarkable law in 1975 (the so-called Corporate Average Fuel Economy regulation) whereby US automobile manufacturers had to double the gas mileage of the average car sold by 1985. This law worked - efficiency of American automobiles went from 14 miles per gallon to nearly 28 (one error in hindsight is that the law excluded light trucks, the chassis' for today's popular gas guzzling SUVs). Not only did this law reduce US dependency on foreign oil, it also dramatically reduced harmful CO2 emissions at a time when Newsweek was warning the world of global cooling.

Since 1975, no US Congress or administration has had the courage to take on the issue of US dependency on foreign oil. Now, to add to the task, the US is faced with growing dependency on foreign natural gas. If Vladimir Putin has his way, citizens of Europe will, in his lifetime, pay whatever price he asks to continue to heat and light their homes; if Russia can increase US dependency on large-scale imports from Russia of liquefied natural gas (LNG), Americans, too, will be dependent on Russian gas for heat and light.

Meanwhile, Putin will try to keep oil and gas issues separate, even though Russia will continue to be a large exporter of oil. He can count on OPEC to continue to conspire to cause mischief and drive up the price of oil which is mainly used for transportation in Europe and the US, while the proceeds are used increasingly to finance arms (in Venezuela and Algeria, for example, bought from, you guessed it, Russia) and increasingly bad behavior in the OPEC countries.

The only US lawmaker who appears to understand the full scope of the energy issue is Senator Richard Lugar. In March, 2006, Lugar introduced the Energy Diplomacy and Security Act. This bill recognizes that the US is in trouble now, even though the full effects of growing dependency on imported gas as well as oil will not be felt for years, it takes many years to develop and implement policies to avoid the otherwise inevitable clash between Russia and the US. It further recognizes that the solution is not a unilateral US-only solution. An important clue to Lugar's insights is that in his bill, energy policy in the US must no longer remain in the province of the US Energy Department, but must be subordinate to the US State Department.

What is Lugar's real vision? He is clearly saying that the US energy problem requires a comprehensive, multi-lateral policy to allow both the US and the EU to become independent of foreign energy supplies. Perhaps he foresees a time when the French may be called upon to share, revitalize and export the safest and most effective nuclear power capability in the world. He may also be saying that the US, the EU and Japan must work together to develop the technological alternatives to the use of fossil fuels for transportation, electricity and heat; in the September, 2005, issue of Scientific American (SA), in fact, credible scientists drafted a plan whereby the US could be completely independent of foreign fossil fuel energy within 30 years. This would be accomplished by encouraging a combination of greater end-use efficiencies, supply substitution, and hydrogen power (SA does not have to trouble itself with matters involving political will and public policy - nonetheless, it's a start).

Lugar is working toward the day when world oil and gas prices sink to, and remain at, a level that deprives tyrants of the wherewithal to sustain tyranny, but enables them (compels them, in fact) to supply the poorer nations of the world with affordable energy. Meanwhile, to the extent that his plan for developments in the US, EU and Japan is successful, new technologies produced thereby will find important markets in developing countries. Above all, his bill could bring about a time when the US and the EU can stand together and be consistent in staring down the tyrants who control the countries and the supplies of fossil fuels because the US and the EU are no longer buying.