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Messy Road to Energy Dominance

November 02, 2003|Michael J. Economides and Ronald E. Oligney | Michael J. Economides is a professor at the University of Houston and is chief technology officer of the Texas Energy Center. Ronald E. Oligney is director of the center. They are co-authors of "The Color of Oil: The History, the Money and the Politics of the World's Biggest Business."

MOSCOW — As Americans worry about Middle East oil supplies, a much bigger energy drama is playing out in Russia. That country now produces about as much oil as Saudi Arabia, exports about 4 million barrels a day and is unabashedly moving toward increasing production. When this is considered alongside Russia's probable dominance in the natural gas market over the coming decades, it becomes apparent that the most radical energy realignment in the world since the creation of OPEC and the 1973 Arab oil embargo is underway.

But the road to energy dominance is not proving an easy one. Late last month, the government of President Vladimir V. Putin arrested oil magnate Mikhail Khodorkovsky on charges of fraud and tax evasion. Last week, the government impounded his shares -- some 44% of the total -- in the country's largest oil company, Yukos.

With a net worth estimated at $8 billion and labeled by some as "Russia's Bill Gates," Khodorkovsky was allowed during the Boris Yeltsin era to purchase Yukos for a relatively small sum in a controversial 1996 privatization deal. In recent months, ExxonMobil and ChevronTexaco have been among the U.S. oil companies bidding furiously to acquire a piece of Yukos.

Speculation is rampant about the government's motivation in arresting Khodorkovsky. The Yukos chief had made his interest in reforming Russia's political structure apparent. He donated large sums to opposition parties, and he has been mentioned as a possible presidential candidate. One theory is that it was these political actions that prompted his arrest. Others speculate that the move is part of a government bid to renationalize the energy industry.

Whatever the reason, the Khodorkovsky arrest complicates Russia's energy future. The country's ascendancy in the energy world has been an important counterbalance to the power of the Organization of Petroleum Exporting Countries. Many in the West hoped it would also point the way to a new-style Russian economy and society.

Two decades ago, the Soviet Union's overreliance on oil revenues for foreign currency contributed to its demise. The oil price collapse of the mid-1980s, following deliberate overproduction by Saudi Arabia, caused many internal fractures in the Soviet regime to become gaping holes, in part because of the country's almost exclusive dependence on oil revenues for hard currency. Some have worried that, in the wake of a collapse in the industrial sector after the fall of communism, Russia is now more dependent than ever on oil. But oil is only half of the story. The bigger Russian future is natural gas.

Gradually, over the last 15 years, the world -- led by the United States -- has moved toward making natural gas its fuel of choice. This is proving to be a revolutionary, though technologically disruptive, transition. But the benefits will prove considerable. Natural gas is a far more efficient and cleaner fuel that lends itself to the miniaturization of the engines it powers. It has a large role to play as we attempt to wean ourselves from carbon fuels.

There are many signs of this shift, the most obvious being that nearly all of the power plants planned or under construction in the United States will run on natural gas. There is little chance that renewable energy like wind and solar power will play a significant role for decades, and perhaps not even then. Consequently, the United States will soon become a massive importer of natural gas in the form of liquefied natural gas.

With by far the world's largest reserves, perhaps as much as 40% of the recoverable natural gas on the planet, Russia will be in the driver's seat for generations to come. China, conveniently on Russia's border, has increased its energy demand by an astonishing 110% in the last decade, and its needs continue to rise.

All of this adds up to one thing: Russia's dominance in energy. That is why the world will be watching closely as Putin moves forward -- both with his prosecution of Khodorkovsky and with his country's move to exploit its considerable energy reserves.

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