Bill Emmott - International Author & Adviser

Article

Two solutions for energy security
Corriere della Sera - November 23rd 2006

Ever since Russia temporarily shut off gas supplies to Ukraine in January, "energy security" has been the hottest topic, if you will forgive such a frivolous cliché, for European political and business leaders. Everyone says they are worried about it. NATO is reported to be worried that Russia might organise a gas-producers´ cartel. The German government says energy security will be one of its priorities as president of the European Union in the first half of next year. Here´s a prediction: at all the summits there will be a lot of talk but no action. For no one, least of all the Germans, wants to offend Russia. There´s too much business involved.

            Yet there are only two ways in which Europe´s worries about energy security can be eased: by investing in the means to diversify the supply of gas, so as to reduce our dependence on Russia; and by praying for an American recession, which would hit demand for oil and gas hard, reducing their prices for a few years, probably quite sharply, and thus shifting the balance of power back from producers like Russia towards the consumers.

            Those prayers may well be answered. The housing market in the United States is collapsing, as the price boom of recent years turns into a bust. That looks likely to hurt consumer spending, which would in turn slow the economy down. No one can be sure whether this just means slower growth for a few months or a true recession, in which unemployment could rise. But whichever happens it will reduce global demand for energy, since America is the world´s biggest consumer. Oil prices have already fallen by more than 25% from their peak in July. The cartel of oil producers, OPEC, is trying to keep prices high by cutting production. But, as they are all greedy for revenues, they are likely to squabble and cheat.

            Such a forecast, which implies that oil prices could drop below $50 a barrel, or even to $40 or less during the coming year, will be as welcome to businesses as it is essentially speculative. Can anyone really depend on energy becoming cheaper? What about booming demand in China and India? Or geopolitics? Prices might fall, but oil has a nasty habit of confounding forecasts.

            The true problem of energy is the volatility of its price during the past five years, not the price level. And Europe´s true problem lies not in oil but in gas. Of course, the price of gas is deeply affected by the price of oil, as they are substitutes for one another. But there is a difference. Whereas oil has a unified world market, with oil available from many sources, through pipelines and tankers, the market for natural gas is broken up into regions. The price in North America can be very different from the price in Europe. The reason is that almost all natural gas is distributed by pipelines. So consumers can buy only from suppliers to whom they are physically connected. Which is where Russia gains its leverage.

            When Europeans say they are worried about the prospect that, in two decades´ time, they will be importing 80% of their gas, up from 50% now, and that most of it will come from Russia, the Russians reply that they too find this worrying: they will have only one main customer. That is true, but not comforting for Europe, especially when Russia´s gas giant, Gazprom, is trying to buy some of the distribution companies used by its own customer, in order to increase control.

            There is, however, a solution on its way. The right thing for Europeans to talk about at their summits is how to accelerate its arrival. The solution is liquefied natural gas, which is transported in tankers and so can be bought from all over the world. Currently, LNG accounts for only 7% of global gas supplies, and is mainly used in Japan and South Korea. The trouble is that it needs special terminals for the tankers, which are expensive to build and rather ugly. Italy has just one such terminal. More are planned, but they are controversial. It needs to build its new terminals, and overcome opposition to them, as rapidly as possible. Once gas can come in tankers as well as down pipelines, the Russians will be far less scary.


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