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Petropower

The oil market is increasingly dominated by state-run entities pursuing geopolitical objectives that have nothing to do with profit.

11:00 PM, Jan 8, 2006 • By IRWIN M. STELZER
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UKRAINE is the West writ small. Its confrontation with Russia over energy supplies, during the course of which Vladimir Putin gave "cold war" a new definition, is a warning to major energy-consuming countries that their long-term prosperity is in the hands of very dangerous people.

It's no news that the OPEC oil cartel is not the most reliable supplier of the oil that advanced economies need to keep their trucks and cars moving, their planes flying, and some of their homes heated. These oil-producing countries have combined to keep prices above competitive levels and have not hesitated to "unsheathe the oil weapon"--read, boycott consuming countries--when dissatisfied with American foreign policy, as they were in 1973 and 1974. That includes, most notably, Saudi Arabia which nevertheless attempts to pass itself off as a reliable supplier of energy.

As does Vladimir Putin, who kept a straight face when announcing that his willingness to end his cutoff of gas supplies to Europe--a supply shutdown that included refusing to allow gas from Turkmenistan and Kazakhstan to flow through Russian pipes--proves that Russia is a reliable supplier. Never mind that it was on his orders that Gazprom cut off supplies to Ukraine, and by extension to Germany, France, and other countries--despite existing contracts that run until 2009. Remember: This dispute was not only about prices. Belarus, the former Soviet republic that has elected to stay in Russia's sphere of influence, has not been faced with the massive price increases Gazprom has imposed on more Western-oriented Ukraine, Georgia, and Moldova.

Putin's message is clear: Russia's energy resources, now completely under the control of the state, provide it with a new weapon, petropower. And Putin is willing to use it to restore Russia's influence to levels that existed when it was a superpower. That's what the destruction of Yukos was all about and that's what the renationalization of Russia's energy infrastructure is all about. Putin reasons that if oil could be used for decades to mute American criticism of Saudi domestic policies, Russian oil and gas can be used to shut down Western criticism of his increasingly dictatorial policies at home.

THE SUPPLY CUTOFF to Europe had no direct effect on America. But it served as a warning that what is left of the nation's energy security strategy is in tatters. The Bush administration had hoped that Iraq would return to world markets as a major, and American-friendly, oil producer. The Pentagon predicted that Iraq would ratchet up its production to over twice the prewar level of about 2 million barrels per day. In the event, production is stalled at only a bit more than 1 million barrels per day, as sabotage and decades of underinvestment have combined to limit production and virtually free gas for Iraqis keeps domestic consumption so high that there is little left to export.

The second strand of the administration's policy was to persuade Congress to open up parts of Alaska for drilling. Congress refused. Finally, the White House sought to reduce its exposure to OPEC by increasing purchases from Russia. That plan, too, has come a cropper: Putin has invited OPEC representatives to a meeting to coordinate their policies with his.

There's worse. Venezuela, one of America's top crude oil suppliers, has always been a reliable business partner, even honoring its supply contracts when the Arab members of OPEC instituted their boycott. Now, however, that country is run by the rabidly anti-American, pro-Castro, Hugo Chávez. He has raised taxes, sued for massive back taxes (shades of Putin's assault on Yukos), forced the major international oil companies to give state-owned PDVSA majority ownership of their oil concessions, and forged an anti-Yankee alliance with other Latin American oil producers such as Bolivia's Evo Morales.

All of this is bad news for countries such as the United States and the United Kingdom where major companies--BP, Exxon, and others--operate within the constraints of shareholder-imposed requirements to maximize profits. They are private-sector players in a game increasingly dominated by state-run entities pursuing geopolitical objectives that have nothing to do with mere profit maximization.

Putin keeps prices to favored allies below market levels; Chavez makes cheap oil available to Cuba; Middle Eastern countries, with the possible exception of Kuwait, refuse to allow Western oil companies to invest capital and expertise to develop new reserves although the host countries would benefit from such development; China pumps $1.2 billion into Sinopec, a listed company, to cover its losses. These are the acts of power-maximizers, not profit-maximizers.