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The Annual "Will Europe Freeze?" Month

Ah yes, it is that wonderful time of year. Fresh snow, college football bowl games in the US, a new year...and uncertainty surrounding European energy security. Some things never seem to change.

This year adds a few new wrinkles to the annual, "Will Europe Freeze?" month however. For the first time in years, the center of energy disruption does not appear to be the Ukrainian border. Ukraine has paid in full and on time for its use of Russian gas during 2009, and both Russia and Ukraine appear determined to avoid a gas war during an election year. So this year, the energy disputes have shifted north.

First, Belarus and Russia remained locked in heated (excuse the pun) negotiations about oil supply prices between the two countries. Russia has already cut oil supplies to Belarus once this week and many analysts expect further restrictions in the weeks to come. The clash feels all too familiar: Russia, frustrated with its neighbor's overtures to the West decides to throw its weight around in the energy sector to bring it to heel. Of course, the blame also resides with Belarus which has for years subsidized its economy through cheap energy from Russia. If the country truly wants to play on the international arena, it must now be prepared to pay market prices for its resources.

Second, Lithuania has been compelled to shut down its aging nuclear power plant on New Year's Eve, leaving it completely dependent on Russia for its energy supply. The closure was required by the European Union, but leaves Lithuanians feeling very nervous. Russia has already played its energy card in the Baltic, shutting down its oil pipeline to Lithuania in 2007. Energy supply form other EU countries remains extremely weak, and a dramatic increase in energy prices is very likely for this Baltic country already struggling through an extremely difficult recession.

Finally, the UK is approaching capacity limits as it struggles with an extremely cold winter. The Wall Street Journal is reporting today that Britain only has gas storage capacity equivalent to 4% of annual consumption, compared with over 100% storage in the US and 19% in Germany. And National Grid warned this week that supply will be tight in coming weeks.

None of the preceding events really come as a surprise. Despite that, Europe has again been caught off guard. The Spanish Presidency is trying to salvage a July Commission proposal regarding gas security and supply but countries continue to insist the Commission is overstepping its authority. And efforts to encourage greater infrastructure developments within Europe remain merely efforts. So what will it take to really see the development of a true European energy policy? In the US, it took two oil embargoes before the country started developing strategic reserves. And the price of oil reached $160 a barrel before consumer's behavior started to change.

Readers Pat and Pamela both suggested that the Atlantic Review analyze Russian and European energy policy in the upcoming year. This will certainly be an important topic, particularly in the first few months. But at first glance, little has changed. The Russian energy policy of 2010 seems identical to that of preceding years: throw its weight around in the natural resource arena to extract concessions in the political realm. And there still is no real European energy policy to discuss. Europe continues to shiver and simply hope the heat stays on.

We Need to Focus on Russia

While Western Europe welcomed VP Biden and Secretary Clinton's announcement for a new and more open engagement of Russia, Ariel Cohen of the Heritage Foundation thinks that America should not push the reset button yet.

Dr. Cohen is concerned about Russia's Revisionist Foreign Policy. He argues that Obama administration "must raise the profile of Russian, Eurasian, and Caspian affairs on the U.S. foreign policy agenda," because "Russia is and will remain one of the most significant foreign policy challenges."

Russia strives to dominate Europe, particularly Eastern and Central Europe, including Germany, through its quasi-monopolistic gas supply and its significant share of the oil market and of other strategic resources. (...) Russian energy giant Gazprom has been on a shopping spree, acquiring European energy assets. Europe is projected to be dependent on Russia for over 60 percent of its gas consumption by 2030, with some countries already 100 percent dependent on Gazprom. Russia has shown a willingness to use this dependency and its energy influence as a tool of foreign policy, shutting down or threatening to shut down the flow of gas to countries perceived to be acting against Moscow's interest, as in the cases of Ukraine, Georgia, and Azerbaijan.

German policy makers are considerably less concerned about dependence on Russia gas and argue that Russia needs trade with us at least as much. Perhaps they are naive. Or the Heritage expert still has a Cold War mindset. Or it is a mix of both.

I mistrust the Russian government and I am concerned about Russia's foreign policy, but believe that a new engagement (pushing the reset button) will serve us better than Cold War rhetoric. We need to work with Russia on common challenges (nuclear disarmament, sanctions on Iran, proliferation in general, Afghanistan, transport routes to Afghanistan etc) and should avoid for now unnecessary confrontations over missile defense and further NATO enlargement for Georgia and Ukraine, which are not ready yet anyway and who would not contribute to our collective defense.

In my humble opinion, Obama is on the right track. Europeans, however, still have to do their homework: We need to reduce our energy dependence on Russia and we need to a joint EU position on Russia, i.e. need to find consensus among Western and Eastern EU members. Russia will only respect a strong and united EU.

Germany Pushes for Gas Pipeline with Russia

Ulf Gartzke writes in the Weekly Standard blog:

German Chancellor Angela Merkel has urged EU Commission President Jose Manuel Barroso and Czech Prime Minister Mirek Topolanek, whose country currently holds the six-month rotating EU presidency, to back the planned Nord Stream gas pipeline linking Russia and Germany via the Baltic Sea. According to leaked excerpts of the letter, published by the Financial Times Deutschland, the German leader argues that the recent gas dispute between Russia and Ukraine showed "that the EU must become more independent and crisis-resistant in its energy supplies". To achieve that end, Merkel writes, the EU needs to better diversify its gas supply and transport routes. Hence it was of "great significance" that the Nabucco, Nord Stream and South Stream pipelines should be "politically desired and supported by all EU member states".

Europe's very cold war: Russia cuts gas to Ukraine

Ukraine enters 2009 stuck between a bear and a hard place. 

The hard place is the west, who is like a friend who always says your invitation to the party is in the mail, but it never shows up.  Since the 2004 Orange Revolution Ukrainian President Viktor Yushchenko has pushed and pulled to move Ukraine toward EU and NATO membership, and yet its prospects remain shrouded in ambiguity.  While NATO has promised future membership someday, the Alliance decided to not move forward with Membership Action Plans for either Ukraine or Georgia at a NATO summit in December, again leaving them in limbo.  

And then there is the bear: Ukraine’s slow push west is a thorn in the toe of Russia who considers Ukraine part of its sphere of influence, and is increasingly tenacious in bearing its chilling grizzly teeth.
 
2009 is not likely to bring much warmer relations for Ukraine with either the west or Russia.  I wrote about Ukraine’s improbable 2009 NATO prospects in a post titled "Why Ukrainian’s don’t want NATO".  Regarding Ukraine’s easterly neighbor, Russia has launched the new year with a cut off of gas to Ukraine leaving it and a baker's dozen of European countries with (in some cases drastically) reduced gas supplies at a time when it is cold in Europe, very cold.

The reasons for Russia’s gas power play are both economic and political

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The Impact of the Oil Shock: Trade Networks Shrink

This is a guest blog post by Donald Stadler, an American living and working in London:

Washington Post economics columnist Robert Samuelson recently wrote a piece about the trade impact of the oil shock on the US, quoting economist Jeffrey Rubin of CIBC World Markets, who predicts that oil will go to $225 a barrel/$7 a gallon before this is finished.

Apart from the obvious impact on per-liter fuel prices in Europe (I have heard of diesel prices as high as £1.99 a litre in the UK), there are some interesting side effects on world trade.

The bottom line is that shipping cheap manufactures thousands of miles make much less sense than it has this past decade. Since 2000 the cost of shipping a 40 foot shipping container from East Asia to the US has gone from $3000 to $8000, and if oil prices go to $200 a barrel this will go to $15,000 per container.

Some production will be brought back to the US and Europe, and other production will go from Asia to nearby low-wage countries like Mexico (for the US) and Poland/Bulgaria/Romania, and perhaps Russia and Turkey (for the EU). This may be good news for factory workers in Italy and in depressed areas of Germany and the UK.

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Global Oil Panic: The United States of America

Oil prices are on the up and up, setting new records at the pump. Each time this happens, a spate of panicky reactions in national politics, all isolated from each other, burst up. First, a brief look at the state of the debate in the USA:

In the USA, McCain has proposed reacting to the higher oil prices by temporarily cutting taxes. This is in keeping with the Republican solution to everything -- cut taxes. Hillary Clinton has jumped on the McCain tax cutting train, hoping to draw more contrasts with Barack Obama. Meanwhile, Obama finds himself in the same camp as George W. Bush in opposing a symbolic tax holiday. A few paragraphs from the New York Times, via Drezner:

At a meeting with voters in North Carolina on Monday, Mr. Obama said lifting the gas tax for three months would save the average consumer no more than $30, a figure confirmed by Congressional analysts. Mr. Obama has previously dismissed Mr. McCain’s proposal as a “scheme.”

“Half a tank of gas,” Mr. Obama told his audience. “That’s his big solution.”

President Bush’s spokeswoman essentially sided with Mr. Obama in saying that tax holidays and new levies on oil companies would not address the long-term problems of dependence on foreign oil.

Dana Perino, the White House spokeswoman, said gasoline prices were “entirely too high, but I think it would be disingenuous and unfortunate for American consumers for them to be led to believe that there is a short-term fix.”

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In Berlin, Outrage Over Nord Stream Deal Seems to Have Died

David Francis, an American reporter traveling through Europe to report on EU energy security issues, notes that Germans are not concerned about dependence on Russian energy. He wrote the following guest blog post and asks Atlantic Review's readers why Schroeder got away with the Nord Stream deal:

I've been in Berlin for the last week, interviewing German officials about the Nord Stream natural gas pipeline, more commonly know here as the Baltic Sea pipeline. For those who aren't familiar, the pipeline is controversial for a number of reasons. First, it makes Germany heavily dependent on Russia's state-controlled energy monopoly Gazprom, a firm that in the past has been accused of playing "pipeline politics." But the main controversy surrounding the deal, in Germany at least, centered on former German Chancellor Gerhard Schroeder, who pushed hard for the deal before leaving office, only to be named chief of Nord Stream's shareholder's committee after leaving office. This position pays quite a large paycheck.

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A Different Kind of Quagmire: Iran

Tired of the same old boring quagmire?  Looking for a new kind of quagmire to talk about with your friends?  Good news if you are, because Iraq is not the only quagmire around.  No need to look far—keep it in the “axis of evil.”  Iraq’s neighbor, Iran is also a quagmire of a sorts… a diplomatic quagmire for the transatlantic allies. 

I’ll corroborate: the United States and Europe have been trying to anneal sanctions against Iran through the United Nations Security Council for years, only to have their proposals consistently rebuffed and watered down by China and Russia.  The latest US National Intelligence Estimate (NIE), “Iran: Nuclear Intentions and Capabilities” (PDF version), is unlikely to make the pursuit of sanctions any easier:
We judge with high confidence that in fall 2003, Tehran halted its nuclear weapons program; we also assess with moderate-to-high confidence that Tehran at a minimum is keeping open the option to develop nuclear weapons.
Good news, right?  Only kinda, according to Ralf Fuecks who points out at Atlantic Community that Iran remains a threat, regardless of the NIE:
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