Sunday, November 25, 2007

A Potential Oil Crisis In Russia?

Sources: Russia's Gas Crunch (Washington Post); Russian Gas Shortfall Is `Urgent' Concern, U.K. Lawmakers Say (

Last week Gazprom, a large Russian energy company, announced it was tripling gas prices in Belarus. Other countries have also been forced to accept an increase in gas prices. While many saw these as political increases, some analysts feel the increase are a result of inefficient management and a decline in Russian gas production. Further, analysts feel that Russian gas production may not be able to keep up with the demands of the export and domestic markets. One individual from the European Union stated “the prospective shortfall in Russian gas production represents an urgent energy security concern for the European Union.”

Western Europe imports around 25% of their gas from Russia who has a history of cutting of gas exports for political reasons. Further, Russia controls over a quarter of the world's gas reserves. Unfortunately for the rest of the world, discovery of new fields and output from current oil fields is, and has been, falling.

However, the expensive and needed investments are not likely given the harsh environments where new investments hold the most promise. Further, Gazprom does not have the money or technological ability to make needed investments. A stagnant Russian economy helped to delay the effects of falling oil output, but the expanding Russian economy is increasing the chances of an oil crisis in Russia

Russia will not likely be able to increase gas supplies from Turkmenistan or other central Asian suppliers. In addition, analysts give two barriers to non-Gazprom producers fixing the situation. First, such producers do not have access to Gazprom’s pipeline network. Second, gas production is only economically feasible if the producers sell the gas outside Russia given the low domestic prices.

A future gas shortage is likely and could make for interesting decisions within Russia. As one write points out, “Gazprom [may] face a politically unpleasant choice: whether to cut off internal customers (voters) or the Western customers who are the firm's main source of hard cash.” Hopefully, it will not come to that decision, but proactive measures need to be taken to ward off this potential crisis.

Discussion questions: (1) Do you believe the possibility of an oil crisis is overstated? (2) How do you think a potential crisis can be averted?

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