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G8 Countries Agree on Energy Security Rules
// The Energy Market
The heads of the foreign offices of the G8 countries, meeting in Moscow yesterday, agreed on a document for the summit in St. Petersburg next month. The document is expected to be a foundation for dependable fuel supplies to the world market. In spite of the disagreement over the subject, Russia seems to have convinced the other countries at least to take a common approach to the problem, that of reducing market influences on world oil prices. Russian Foreign Minister Sergey Ivanov announced yesterday that a “solid and all-encompassing” document on energy security was almost ready. According to Lavrov, the document, initiated by Russia, supports “identical market rules of the game on the energy market for all.” U.S. Secretary of State Condoleezza Rice said the document contained “common sense.”
Saudi Arabian Oil Minister Ali Naimi said in an interview earlier this month that “there is absolutely no connection between price, supply and demand for oil.” Energy markets do have their peculiarities. Natural gas, for example, is traded in long-term contracts and politics often plays a role on that market. In the end, though, demand matters. No matter what relations between Russia and Belarus are, it was impossible to maintain an artificially low gas price for it.
Oil is a different case. Politics plays a role on that market too, but attempts by cartels such as OPEC to control the market are only partially successful. Its control of 30 percent of the world oil market does not allow it to reduce oil production, and it is unable to increase production because it is producing at full capacity already. The main impediment to increasing production is the slow development of new fields, that is, lack of investment. The growth in demand for oil is related to the unexpectedly growth of the world GDP, which is related in turned to the growth of the economy and energy consumption of China. And, to the surprise and unpreparedness of many, growth of the world economy is not slowing down.
Many new gas and oil fields will require large investments for development and will be profitable only with much higher oil prices. These are deep-water fields, deep and high-pressure gas deposits, processing of bituminous sand and gas-water solutions and the use of low pressure gas. These are sources that no one would have thought of using not long ago. Daniel Yergin of the Cambridge Energy Resource Associates predicted that $16 trillion will be invested in energy production by 2025. Private venture investment in alternative energy source research has reached $6 billion in the United States.
In the final analysis, energy security means the worldwide energy deficit in the middle-term. People understand energy security differently, however. In the eyes of European political functionaries and Russian leaders, it is guarantees of supplies and investments. Market considerations are secondary. Limiting market freedom will lead to reduced investment, however, which means that energy prices can be expected to continue to rise.
Maxim Shishkin
All the Article in Russian as of June 30, 2006
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