Russia's Energy Market Is Running on Fumes
by CHRIS FAULKNER
Jan 19, 2014 | 1085 views | 0 0 comments | 19 19 recommendations | email to a friend | print




Russian president Vladmir Putin has won some begrudging admiration for his strategic triumph during the Syria crisis. Let him have his moment. It won't last long. A new development threatens to rob Putin of a significant part of his international heft.



That development, of course, is America's energy revolution.



By ExxonMobil's estimates, natural gas is on track to becoming the second-largest energy source in the world by 2025, outpacing even coal. And the United States just became the biggest natural gas producer on the globe, overtaking -- you guessed it -- Russia.



While the United States will benefit economically, politically and diplomatically from this energy revolution, Russia will come out the biggest loser.



Start with simple economics. As much as 40 percent of Russia's economy is dependent on its oil and gas sales. According to some experts, the U.S. shale boom could undermine this source of growth, causing Russian oil exports to plummet by as much as 25 percent over the next several years as other nations embrace the American energy alternative.



There's a political factor at play, too. The post-Soviet government has sought a social contract that goes something like this: The Kremlin will ensure economic stability, just so long as the citizenry kindly stays out of politics. But building political legitimacy on economic progress can be an awfully risky endeavor, as Putin will soon learn.



And while it's possible that Russia may have untapped natural gas resources, the country is not competitive in developing them -- nor is it likely to be. Russia's political class is heavily entrenched in its business sector, which is as corrupt as Siberia is cold. Efficiency isn't the country's strong suit. Don't expect any new infrastructure to be built without the Kremlin's friends siphoning off a bit of cash first.



Russia's Soviet-era energy infrastructure is aging, and was of questionable quality even when it was first erected. There's reason to believe Russia is already performing at capacity, adding further questions to its competitive potential.



In 2007, when TIME named Putin its Man of the Year, two of its correspondents remarked to the man himself that he "must feel lucky that the price of oil is so high."



"Fools are lucky," Putin responded. "We work day and night!" And yet, a savvy observer might note, Russia continues to fall behind in the energy-export race.



And keep in mind that the United States is beating Russia on price, too. The price of American natural gas is about a third of Russia's. International buyers are catching on. Where Russian gas giant Gazprom once fulfilled the orders for 37 percent of Europe's natural gas supply, it now sells only 25 percent.



This extra competition is internationally disruptive. The Kremlin has long used its near-monopoly in the energy sector as a tool to assert its global power.



For example, in 2006 and 2009, Russia tried to strong-arm Ukraine by shutting off its gas supplies, leading to energy shortages across Europe. Putin used this geopolitical move to underscore his influence throughout the region, winning diplomatic points at the expense of Europe's shivering families that winter. Russia's move was retaliation against the Ukrainian government, which has been leaning westward since the Orange Revolution.



Likewise, Russia has used energy prices to try to control its neighbors. After the 2003 Rose Revolution, Georgia too began to orient its foreign policy towards the West and away from Russia. The Kremlin promptly responded by announcing significant price increases for gas.



However, despite this move, Georgia has been able to supplant its supply somewhat, thanks to its neighbor Azerbaijan. This alternative has given the local government confidence to hold firm against Russian pressure.



These are just two examples among many demonstrating how Russia's energy policy supports -- and sometimes drives -- its foreign policy.



But as the global energy equation tilts toward the United States, Russia's influence and international leverage diminishes. The United States must continue to develop its natural gas supply. The benefits redound far beyond the domestic sphere.



Chris Faulkner is President and Chief Executive Officer of Breitling Oil and Gas.
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