The Foreign Service Journal, December 2003

investments in the Persian Gulf, which has the most abundant and economic petroleum resources, due to host-government policies. There is a growing short- age of domestically produced natural gas, and higher gas prices are seen to be negatively affecting the U.S. economy. Both countries have strong geopolitical and eco- nomic interests in fostering oil and gas supply diversi- ty: the U.S. search for a diversity of sources is a good fit with Russia’s search for markets. Energy coopera- tion seems like a good complement to cooperation on the global war against terrorism. Moreover, Russia is in need of foreign investment in the oil and gas sector, particularly in high-risk exploration or technologically challenging develop- ment, such as offshore Sakhalin. The easy steps for reviving production to previous levels have been taken, including the use of Western contractors for modern seismic interpretation, drilling and reservoir management technology. Sustaining production growth now requires providing suitable business con- ditions for multi-billion-dollar domestic and interna- tional investments. By international standards, the Russian oil and gas patch remains woefully under- invested relative to its resource base, especially in transportation; i.e., oil and gas pipelines. American oil companies have both the means and the interest. The convergence of corporate and government interests would be appealing to most administrations, and certainly to one that traces its roots to Midland, Texas. Without energy, a bilateral economic dialogue may be reduced to the seemingly implacable chal- lenges posed by chickens, the Jackson-Vanik amend- ment and WTO accession. Happy Marriage or Hype? At the same time, policy-makers should not burden U.S.-Russia energy relations with inflated expecta- tions that conflict with economic reality. No amount of success in promoting energy cooper- ation with Russia will fundamentally improve U.S. oil supply vulnerability. Three-quarters of known oil reserves in the world are in the OPEC countries. Two-thirds of the reserves, and the most economical to produce, sit in the Persian Gulf. Oil is a largely fungible commodity traded in a worldwide market under short-term contracts. Certainly incremental production from Russia or Alaska, or any other non-OPEC (and particularly non- Middle Eastern) sources, is important in extending the time when the last incremental barrel must come from the Persian Gulf. This moderates the monopoly power of the OPEC cartel, whose uneven manage- ment of production policy has led to volatility in pric- ing and big increases in non-OPEC production world- wide, not just in Russia, for the past two decades. Increases in oil production outside the Middle East continue today in the Caspian, from deepwater reserves off West Africa and in the Gulf of Mexico, from Canadian tar sands and in the Venezuelan Orinoco Belt. With 5 percent of total world oil reserves, Russia is important but no more so than these other areas. Russia certainly cannot replace Saudi Arabia or other major producers in the Persian Gulf. With a reserve/production ratio of approximately 20 years, Russia cannot be compared to Persian Gulf producers with a ratio of 70, 80 or over 100 years. Russia is a price taker, not a price setter, in an energy market dominated by OPEC until a technological leap advances the world beyond the age of petroleum. A serious supply disruption in the Persian Gulf will have the same impact on world oil markets and U.S. oil supply and prices whether significant volumes of Russian oil reach U.S. shores or not. This was demon- strated this year when temporary disturbances limited Venezuelan and Nigerian oil exports. Even if every barrel of Russia’s current 8.5 million total daily pro- duction were to be exported to the U.S., sparing not a single barrel for domestic consumption, it still would not satisfy current U.S. import needs of 11 million barrels of oil per day. What’s more, we are treaty- bound to share in the pain of any major supply inter- ruption by allocating available supply with other International Energy Agency countries. As long as we are so import-dependent, the U.S. is destined to suffer through the vicissitudes of global oil markets along with the rest of the world. Russia’s Dilemma There is a serious policy debate in Russia about whether a natural resource export strategy is the best way to revive and modernize the economy. This debate has been somewhat muted in recent years by F O C U S 34 F O R E I G N S E R V I C E J O U R N A L / D E C E M B E R 2 0 0 3