Keeping the oil flowing

Concerns about energy supplies have dominated newspaper headlines since the Russian-Ukrainian gas crisis of 2005. Yet are these concerns legitimate?

'Peak oil' theory

Physical scarcity of hydrocarbons is not an issue, despite Jeremiahs who forecast a point in time at which the maximum global petroleum production rate is reached, after which the rate of production enters its terminal decline. The 'peak oil' theory should not stick: new reserves are being discovered around the world on a regular basis. The bringing on stream this week of Iran's vast Azadegan field -- estimated to have some 26 billion barrels of oil -- and expansive, still largely untouched provinces in Russia, such as Yamal and East Siberia, show that the Earth is far from running on empty.

Oil: geopolitical weapon?

The inter-relationship of consumer and producer states is a longstanding phenomenon, which historically overcame major obstacles, such as the East-West confrontation during the Cold War. For many observers, energy security -- or insecurity -- epitomises the perceived readiness of producer states to cut off energy supplies willy-nilly. The lack of readily available substitutes for oil and gas further exacerbates the fears of consumer states. But energy-rich states have concerns too, and they are rooted in energy nationalism realpolitik. 

Most, if not all, governments of energy-rich states have either already established or are seeking to establish control over their country's natural resources, which they -- very fairly -- see as part of their sovereignty and, at a time of record high prices, a means to development. These producer states fear 'consumer cartels' almost as much as consumer states fret over a possible disruption of supply.

They may drive a hard bargain, but they also need and depend on consumers, like any storekeeper or market seller. Global energy producers, such as Saudi Arabia, Russia and Iran, rely heavily on exports of oil and gas, with Russia's federal budget receiving -- on some calculations -- up to 25% from the sale of energy commodities.

Concerns on both sides are likely to persist given the geophysical imbalances in the distribution of oil and gas deposits across the globe, and increasing political divides between consumer and producer states.

Yet the ideological divide between Russia and the West today is not fundamental. Russia is still interested in being a reliable energy partner to Europe. Moscow would also think twice about wielding its 'oil weapon' to blackmail the West: it runs contrary to Russia's interests because of the undiversified nature of its economy, and the numerous personal interests of the Russian political and economic elite that are tied to oil and gas revenues.

In fact, to strengthen and perpetuate the relationship, Russia has shown readiness to invest billions of dollars in constructing bypass pipelines -- such as Nord Stream, South Stream and Bourgas-Alexandroupolis -- to ensure that Europe remains a good customer for its oil and gas in the future. The mutual dependency of the energy inter-relationship also provides a buffer for Russian-European relations in the diplomatic sphere, as has been frequently acknowledged by the Russian leadership.

Russia may be arrogant and insecure, but its energy policy is entirely rational and pragmatic. Oil and gas will continue to flow to the West regardless of who is in power in the Kremlin.