Filling up in Russia - high sulfur and high cost
Several U.S. politicians this week are calling for a windfall profits tax to punish oil companies for making too much profit and allegedly price gouging at the pump. Likewise, on the international stage, several European and American leaders have accused Russia of using gas prices to bully its neighbors and manipulate world energy markets. U.S. Senator John McCain, a leading contender for the Republican Presidential nomination in 2008, observed last week in Brussels that the Soviet Union never cut off natural gas to its neighbors, but Gazprom did last year.
Piling on with more Russia-is-an-energy-manipulator commentary yesterday was one Max Boot, a fellow at the Council on Foreign Relations in New York. To read the LA Times article registration is required, but Tennessee Law School Professor Glenn Reynolds, who runs the very popular Instapundit blog, posted this excerpt:
Of the top 14 oil exporters, only one is a well-established liberal democracy -- Norway. Two others have recently made a transition to democracy -- Mexico and Nigeria. Iraq is trying to follow in their footsteps. That's it. Every other major oil exporter is a dictatorship -- and the run-up in oil prices has been a tremendous boon to them.
My associate at the Council on Foreign Relations, Ian Cornwall, calculates that if oil averages $71 a barrel this year, 10 autocracies stand to make about $500 billion more than in 2003, when oil was at $27. This windfall helps to squelch liberal forces and entrench noxious dictators in such oil producers as Russia (which stands to make $115 billion more this year than in 2003) and Venezuela ($36 billion). Vladimir Putin and Hugo Chavez can buy off their publics with generous subsidies and ignore Western pressure while sabotaging democratic developments from Central America to Central Asia.
While we won't comment on Boot's implied comparison between Putin and the anti-American loudmouth Chavez, Russia Blog's editors decided to do our own quick comparison of subsidies paid to Venezuelans and Russians.
As the Christian Science Monitor reported last September, one of the best perks of living in Venezuela is paying 7 U.S. cents a liter - or less than a quarter per gallon - every time you fill up. A telephone call to our sources in Moscow (it was 2 a.m. there) confirmed that Russians are paying 80 cents a liter for medium grade gasoline, or roughly the same $3 a gallon we're paying here in Seattle. Our readers should also know that the quality of Russian gasoline, for reasons we previously discussed here, is generally lower than American petrol. Russians also pay far more as a share of their income at the pump than we do.
As for the other subsidies Russians allegedly receive from fat oil revenues, Putin's government has actually been cutting back on basic services, by ending free public transportation for the elderly, and has announced plans to cut 20% of scientists already meager salaries from the federal payroll. Clearly the oil and gas money isn't being used to directly bribe the Russian people into thinking that Putin is a benevolent Czar.
Boot goes on to mention the windfalls reaped by Kuwait, the United Arab Emirates, and Saudi Arabia from higher world oil prices. Unfortunately, an LA Times reader unfamiliar with OPEC would just assume that Russia was also a member of the Arab and Iranian dominated oil cartel, when it is not. I say all this as someone who has regularly enjoyed Max Boot's articles.
These errors based on stereotypes about Russia are unfortunate, because there is a strong case to be made against the state-directed (Gazprom) model of energy development. Since a growing share of the world's proven reserves are now controlled by state-owned cartels and monopolies, there is a legitimate question of whether governments have an incentive to inflate their energy reserves, and could get away with this for a much greater period of time than any privately held multinational like Exxon or BP. Last year Twilight in the Desert, a book written by maverick Houston oil analyst Matt Simmons, disturbed investors by claiming that Saudi Aramco is lying about how much oil is left in the Kingdom. Peak oil enthusiasts, who want the U.S. and other leading economies to radically restructure their energy use and development, are also insisting that the world is running out of oil and we are doomed to a global depression unless we adopt draconian policies - of course, many experts insisted that the world was running out in the 1970s after the Arab oil embargo.
However, Russia is not bound by OPEC quotas, and soon will surpass Saudi Arabia as the world's leading producer of oil. More importantly, Americans don't have to worry about Russian petrodollars going to fund terrorists. Russia has the largest natural gas reserves in the world and can ship LNG to the U.S. in just nine days. Russia cannot easily ramp up production however, without more investment and modernization. Clearly Russia and America need each other, which is why we are so passionate about correcting misinformation that damages the prospect for better relations between our two countries. Russia is not like Iran or Sudan where there is a serious national security and egregious human rights dilemma for investors. If politics pushes American investment away from Russia's energy markets, China will be more than happy to seize the opportunities we abandoned.
UPDATE: While we're on the topic of the perils of state control of energy resources in a global economy, the oil and gas industry website RigZone notes today that Petroleos de Venezuela (PDVSA) is buying 100,000 barrels crude from Russia to meet its obligations (i.e. contracts Chavez signed to practically give away oil for political reasons). This in a country, like Iran (soon to be one of the world's leading importers of gasoline while exporting crude!), sitting on a sea of oil. Apparently Venezuela is no longer just importing weapons from Russia. Compared to PDVSA and Iran's state oil company, Gazprom is a model of efficiency.