Our global need for energy reliability binds us together as surely as the global network that delivers it; a failure in one part of our network will inevitably affect everyone. Local interests and persistent conflicts that sit astride our networks, including the as yet unresolved issue of Russian gas supply to Ukraine and Europe, have again raised the specter of energy being used as a weapon to gain political leverage. Energy security is at the top of the agenda of the G-8 meeting hosted by President Vladimir Putin in Saint Petersburg. The G-8 has correctly identified the key economic issue, energy interdependence, and now is the time for focused multilateral engagement on this issue.
For some countries that are blessed with vast supplies of oil and gas, the use of energy exports to reward friends and punish foes seems a tempting option. Today, however, it is more likely to prove disruptive to friend and foe alike, as well as damaging to those countries that indulge this temptation. Energy embargoes have generally proven counterproductive. The price rises that followed OPEC’s oil embargoes of the 1970’s were unsustainable and led to conservation efforts and expansion of non-OPEC production. As a result, OPEC’s share of world oil exports dropped sharply in the twelve years following the embargo of 1973-1974.
Experience has taught us that transparency and price stability is in everyone's interest. Pursuit of these principals while encouraging the development of global markets is essential to greater overall growth prospects for the world economy. So when Russia sought earlier this year to quadruple the price of its gas exports to Ukraine, it argued that it was simply demanding market rates. The message sounded fair and it did, for a short time, appeal to some policymakers and investors not fully apprised of the situation.
To be clear, measured price changes implemented over time was never in dispute; indeed, some internal price adjustments for Ukraine were in order. Unfortunately for Russia’s neighbors, it is not the market that determines what price is paid for Russia’s gas or transport; it is Gazprom and its chairman, Dmitry Medvedev, who is also the Russian government’s First Deputy Prime Minister. The price charged by Gazprom for each country bordering Russia is different and is largely determined by political relationships with the Kremlin. Economically speaking, gas supply and transport prices are more correlated to political relationships than to fundamental supply-demand or gas transport basis calculations.