Who’s stoking the fire?

Iran has fueled energy prices and Russia took advantage of them, but who wins long-term? While the world watched Iran and the West squaring off and scaring oil consumers, a less-noticed confrontation between Russia and the European Union took place.

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By  Nicholas Wilson Published  May 2, 2006

Editorial comment|~|comment-200.gif|~|Iran’s president Mahmoud Ahmadinejad says high flying oil prices have not soared far enough yet and consumers deserve to pay more. |~|While the world watched Iran and the West squaring off and scaring oil consumers, a less-noticed confrontation between Russia and the European Union took place.

State-owned energy behemoth Gazprom told the bloc to let it buy chunks of the EU’s distribution and retail natural gas infrastructure or it will consider selling its gas elsewhere.

The demand is a tall order for a bloc that cannot even liberalise its own energy markets to allow free competition between member states.

The EU is unlikely to allow outsiders have a piece of their jealously guarded energy pie, and is even less enthusiastic about allowing in any company, let alone an outsider’s state-controlled monopoly, which wants to span a continent with its infrastructure and already has an iron grip on nearly all natural gas plants and pipelines within Russia.

Europeans, who got jumpy about their energy supplies this winter when Gazprom turned the spigots off to Ukraine, and inadvertently to Western Europe too, just got even jumpier.
It’s good news for Middle Eastern gas suppliers, including Iran, but not exactly what volatile energy markets needed to calm their rough waters.

And while trans-Iranian gas pipelines may help slake Europe’s and Asia’s thirst for energy, avoiding Gazprom by heading south of the Caspian Sea may be a case of hopping into the proverbial frying pan.

Tehran is ratcheting up the tension with both rhetoric and deeds, and seems bent on playing nuclear poker with the United States and Israel: furthering its atomic programme while funding Hamas and saying that oil prices aren’t high enough yet.

It is anyone’s guess how high oil prices can go before they undermine global economic growth to the degree that energy demand drops, but somewhere that cost level exists. It’s not in either producers’ or buyers’ interest that Tehran and Washington inadvertently discover that price through escalating the political tension.

Some people think prices are already too high. Lord Browne, BP’s CEO has talked of a possible sharp price drop and called current levels “unsustainably high.” John Hofmeister, head of the Shell in the United States has called prices “artificially inflated.”

And it’s not just the net consumer nations whose economies are affected by high oil prices — Dubai’s construction industry is beginning to feel the pinch of higher diesel costs.
But we have not yet hit the 1980 price crisis level.

The headlines already scream of record prices, yet taking inflation into account, crude costs still have some way to go before hitting their 1980 record of what in today’s terms would be $US 80 something a barrel. A quarter of a century ago it was the 1979 Iranian revolution, followed immediately by the US-armed Iraqi invasion of Iran that drove prices to an all-time high.

Once again, it is the Iraq-Iran-United States triangle of tension that is frightening markets in the run up to the US driving and hurricane seasons that are only a month away as refineries pressure prices by buying more sweet light crude to meet new US emissions laws.

The result is that consumers are over a barrel that Russia and Iran are using to their own ends. And both countries appear to be politically and economically happy with the cost of energy.

Pension funds also seem pleased with rising energy costs as they pump billions of investment dollars into commodity indices that are heavily dependent on hydrocarbons. According to one analysis $125 billion has poured into commodity instruments since 2004. Whether this fuels prices or just follows them is a hot debate.

What is clear, is that the undoubted winners of soaring oil and gas prices include coal producers, renewable energy firms, nuclear power proponents and stable, non-confrontational, reliable hydrocarbon producers whose economies are almost entirely dependent on energy revenue, such as Qatar.

Who the short- and long-term losers will be isn’t at all clear. But while it looks like price-stoking Iran and muscle-flexing Russia are currently able to call the shots in the market, they certainly aren’t making too many friends in the West and may well end up struggling to remove the hard-to-remove label of being unstable or unreliable suppliers.

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