Global Energy Security - English

From Russia With Love

By Stefano Casertano29.02.2012Global Policy

The crisis in Iran is remaking the global energy landscape. Instead of relying on oil from the Middle East, China has embraced Russia as its new supplier of fossil fuels – and has propelled the government in Moscow into a position of strategic importance.

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Paul Lowry

In the oil industry people seldom talk about oil prices: there is oil and oil. Some oil is better; better to treat, better to refine, better to make costly products, like kerosene. Other oils generate lots of by-products and are costly to handle and refine. In general, one could say that the “Brent” oil blend, the one that is normally produced in Europe and in some parts of the Middle East, belongs to the first category. The “Urals” blend is more likely to belong to the second category. One could also expect that the Brent is priced more expensively than the Urals, and indeed it has always been so. But lately it has been different; for the first time, the pricing of the Ural blend was higher than other, better blends. Why is that? We can use oil barrels as a thermometer of international relations: China has decided to buy up more Oil from Moscow, and cut the supply from Iran. Somehow, this is a realization of what the analysis in this column suggested on February 15th: The solution for the atomic standoff with Iran had to be found in the East. So China seems to have agreed to turn its back to Iran. This decision has global consequences: Beijing used to be the top buyer of the Revolutionary Guards’ Oil, soaking up some 20% of Iran’s total oil exports. That money now goes to the Kremlin. In addition to Russia, the Saudis are also enjoying the new Chinese shopping spree: Riyad increased its production by 200,000 barrels per day, with much of the additional oil being shipped to Asia. The scenario is clear: In order to convince China to reduce its support of Iran, there has been an international agreement to supply the Asian giant with additional shipments of hydrocarbons from somewhere else. This new arrangement also rehabilitates Russia as a supplier of energy security. We can take issue with the country’s domestic democratic record; and much has been said about Moscow’s passion for choking up European gas pipelines now and then. But recent events indicate that some of the energy-related criticism might have been undeserved. The increased oil sales to China are an example of Russia’s role as a guarantor of global energy security. This is not a new development. Take the Suez crisis of 1956: Egypt’s president Nasser had the brilliant idea to close the Canal by sinking some vessels in it, thus blocking some 50% of the Mideast oil supply flowing to Europe. In the end, Russia covered up for part of the loss. During the energy crisis in the 1970s, Russia was a pain in the back of the OPEC countries, which otherwise would have succeeded in devastating Western economies. And in the 1990s, the recovery in Russian production kept oil price low for many years. When Joseph Stiglitz wrote a book titled “The Roaring Nineties,” he had to thank the Kremlin to some extent. Nevertheless, we would be better off with a different regime in Iran, or even better with an Iran that abandoned its atomic bomb frenzy. The new patterns of oil purchasing are pushing up oil prices at dangerously high levels; the blend traded in the US, called “WTI,” hit 105 dollars on February 20th. Its European cousin, the Brent, was floating around the scary level of 120 dollars. The China-Russia energy agreement comes at a high price for the world economy.

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