Streetwise Professor

Last week, Gazprom assured Italy that gas deliveries would return to normal by the end of the week.

Apparently not.

Which brought this classic to mind:

The past week has seen a confusing series of events involving Gazprom.  (A collection of several stories can be found here.)  Europe and Russia have been gripped by a brutal cold wave, driving up the demand for gas.  Gas shipments to Europe from declined substantially, between 10 and 30 percent, depending on the country.

Gazprom initially claimed that it had not cut shipments, but that Ukraine was stealing gas destined for Europe.  Then Gazprom admitted that yes, it had cut flows, but only by 10 percent, and only temporarily.  Gazprom also claimed that it was not physically capable of increasing gas flows–which doesn’t explain why it cut the flows.  It also claimed that it had increased supplies to Europe (“Our company has increased the supply of gas to the maximum not only to European countries, but also the former Soviet Union,” said Gazprom Deputy Chief Executive Alexander Medvedev). Gazprom also told Putin that it had increased output by 30 percent over the same period last year, and had taken substantial additional quantities out of storage.

So it increased flows even though it wasn’t capable of doing so, but it decreased them too.  Or something.

I see no way of reconciling all of these statements.  It appears that Gazprom’s (and Russia’s) first reflex was to blame Ukraine for any shortfalls in gas delivered to Europe: this would be quite helpful in the context of this year’s wrangling with Ukraine over prices and quantities.  But that story soon became inoperative, and the company/country is/are now engaging in a modified, limited hangout (in the immortal words of Nixon aide Ron Ziegler), admitting some cutbacks.

Most likely explanation. 1. Gazprom was unable to meet domestic demand that spiked during the cold snap without reducing shipments to Europe. 2. Given the increasingly fraught political situation, and Putin’s populist campaign, there is no way Gazprom would favor Europeans over domestic consumers, even though domestic sales are loss-making (due to price ceilings). 3. So Gazprom cut shipments to Europe to ensure Russia was adequately supplied, and in addition, Ukraine siphoned off some gas.

Putin and Gazprom’s Medvedev tried to work these events into their narrative of how spot gas markets are bad:

Vladimir Putin: Mr Medvedev, what about the spot market? Why don’t they buy on the spot market? On the free market?

Alexander Medvedev: Mr Putin, it appears that all that talk about a high-liquidity spot market turned out to be, to put it mildly, a considerable exaggeration since the spot market does not have high liquidity. Although spot market prices went up (they are lower than our prices), Europe was unable to meet its long-term needs in the spot market because ultimately it does not work.

Vladimir Putin: It is virtual to a considerable extent.

Alexander Medvedev: That’s right.

Vladimir Putin: That is, it doesn’t have real products in the required amount.

Alexander Medvedev: It doesn’t and cannot have the required amount.

(These staged dialogs crack me up.  The conversations in Pimsleur’s lessons sound more natural.)

One really weird thing about that: “Although spot market prices went up (they are lower than our prices).”  That says a lot.  One interpretation is that spot market prices spiked in Europe to clear the market, a market that suffered a supply disruption from Russia at the same time that gas demand spiked, and the spot market prices were still lower than Russian prices.

But don’t be too cocky, boys.  Episodes like this should provide the Europeans with even stronger incentives to develop alternative supply sources, and to push the development of a vibrant spot market that doesn’t make them hostage to Gazprom.  Especially when Gazprom spokesman talk like this:

OAO Gazprom, Russia’s natural-gas exporter, is meeting its contractual obligations for supplies to Europe, while sending less than customers have requested during freezing weather, an official said.

“They are asking for more than we are obliged to supply,” said Sergei Komlev, head of pricing at Gazprom’s export division. “There is a difference between wishful thinking and agreed contractual volumes.”

Let them eat cake!

Note well that Gazprom insists customers take or pay for gas when contracted volumes exceed requirements.  They are perfectly willing to make you take gas when you don’t need it, and tell you tough luckski when you do.

Europe has had numerous wake up calls regarding the reliability of Russia as a gas supplier since 2006.  Maybe one of these days it will finally wake from its slumbers.  The burgeoning market for LNG gives them the opportunity to reduce reliance on Russia in the future, and to rely instead on more flexible supplies with market driven prices (rather than oil-linked formula prices), and to manage price risk through derivatives.

When that happens, the wishful thinking will go quite the other way.

Obama is apparently going to make energy one of the centerpieces of his State of the Union Address (oh for the days when presidents mailed it in–literally).  If it is anything like the gas he emitted at last year’s SOTU, or anything like what is on the WH energy policy page, it will be at best irrelevant and at worst counterproductive.  CAFE is incredibly wrongheaded.  HOMESTAR is an expensive joke.  “Recovery Act Investments”?:

The Administration has invested more than $90 billion in clean energy – the largest clean energy investment in our nation’s history. These critical investments have already created or saved hundreds of thousands of jobs across the country and put the United States on a path to double renewable energy generation from 2008 levels by 2012. In fact, since 2008, more than 20,000 megawatts of new electric generating capacity from wind, solar and geothermal energy have come online, increasing installed capacity by more than 70 percent.

The idea behind investment is not the amount of money you put in, it’s the return you get out.  And these investments by Chu Capital (again, props to Paul Gregory for this felicitous phrase) are generating substantial negative returns.

So again, the Administration That Can’t Tell a Cost From A Benefit. [Also note the typical renewable dodge, focusing on “installed capacity” as opposed to energy generated.  The former number looks much more impressive than the latter: the difference between the two often makes renewables look very bad indeed.]

Renewable energy projects on Federal lands?  Another boondoggle.  And no mention about the fact that vast amounts of conventional energy sources are on public lands, and could be produced cleanly and safely–but are off limits.  And I seriously doubt we’ll hear anything about changing that tonight.

Obama is reportedly going to tout increased domestic production of natural gas.  Here he is playing the familiar role of sprinting to the front of the parade that he had nothing to do with creating, to make it look like he led it all the time.

No, neither he nor his administration nor government more broadly had much at all to do with that which has transformed the gas market, and is in the process of transforming the oil market.  The best thing he can do now is stay the hell out of the way.  The industry is doing quite fine on its own, thank you.

And that would be a good idea more broadly, with respect to energy.  Picking winners, picking technologies, picking fuels.  All things the market can do much better.  The Reagan administration’s best energy policies were to undo the insane energy policies that previous administrations and Congresses had put in place.  In that regard, Obama has a lot to work with: there are scads of insane energy policies currently in place that could use a good junking.  But since many of those are Obama administration brainstorms (or more accurately, brain cramps), that’s not going to happen.

So my bet is you will hear a lot of words about energy tonight.  Constructive action–not so much. Indeed, given past form, more counterproductive initiatives are a better bet.

So Obama has rejected–at least for now, for heaven forfend he make a firm decision–the Keystone XL Pipeline.  He claims that the rejection was not on the merits, but due to the fact that the Republicans had given him too little time–a mere 60 days–to determine whether the pipeline was in the national interest.  This after 3 plus years of the pipeline application began wending its way through the labyrinthine pipeline of the Federal approval process. So it’s not like this just landed on his desk with no prior analysis.  It’s more like: get on with it, Mr. Vote Present.

This from the guy who on every other day berates the same Republicans for foot-dragging obstructionism.  The guy who says he is going to do something every day to create jobs even if Congress doesn’t go along because it is just too slow.

I guess Obama is just President Goldilocks.  This is toooo fast.  This is toooo slow.  But he hasn’t found just right yet.

And the guy who is supposedly sooooo smart that he is bored because his mind is racing ahead of everyone (just ask Valerie Jarrett!) apparently needs a little extra time on this exam.

Please.  This was just another political dodge, wrapped up in a whinging excuse about being hustled along by meanie Republicans.

The administration’s cavils about the pipeline are economically inane:

The truth is that just two of the Administration’s programs – the DOE Loan Guarantee Program and the EPA’s Mercury and Air Toxics Standards – will create more than 10 times the amount of jobs generated by the Keystone XL pipeline, which will only generate a few thousand temporary jobs. In terms of reducing America’s dependence on oil, the Administration’s fuel economy standards alone will save more than twice the amount of oil the Keystone pipeline would deliver.

That is just moronic.  As I’ve noted before, these people cannot tell a cost from a benefit.  It doesn’t get any dumber than that.

Keystone will likely create economic value, as indicated by the fact that private capital is willing to invest.  In contrast, the DOE loan guarantee program–“Chu Capital,” as my colleague Paul Gregory calls it–exists because the green elephants it funds cannot attract private capital: a very strong indication that they do not generate value, and in fact destroy it.  Hell, these companies cannot survive even with lavish subsidies.

The EPA programs–what to say?  These will impose huge costs.  Huge.  The people employed to implement the program are just part of the cost.  The distortions in the power market–less efficient generation, lower reliability–represent a far larger cost: indeed, those employed are expending effort to create distortions, so costs are incurred to incur more costs–who could object to that?  All in exchange for a risibly small health benefit.  This is carbon-tax-by-stealth.  The EPA’s cost-benefit analysis is arguably the worst in the federal government–which is saying something.

This administration would apparently believe that hiring ten times as many people who would be employed on Keystone to blow up oil wells and power plants would count as a huge boost to employment, and would be a far better policy than approving Keystone.* Something to brag about on the WH website.

I better shut up.  They might take that seriously.  I wouldn’t put it past them.

Is there not one economist of rank in this administration with enough self-respect to call bullshit?  After all, such economic stupidity reflects very badly on them, especially inasmuch as their silence connotes assent.

* Not to mention that it is completely illogical to imply that these things are mutually exclusive.

Russia claims that the United States is stoking unrest in the Middle East, and in Iran in particular–in order to make drilling for shale oil economically viable (h/t Renee).  Seriously:

The US is deliberately aggravating the situation around the Iranian nuclear program. According to Russian experts, the conflict’s escalation will help the US to make the production of “difficult” hydrocarbons such as shale oil and gas cost efficient. The multibillion program on the development of shale gas production approved in the US authorities can be implemented only in conditions of high oil prices.  And if Iran in response to Washington’s recent actions blocks the Strait of Hormuz this problem will be resolved by itself, analysts note.

. . . .

“Over the last decades the US has been actively developing shale gas production. Then the US companies started to develop shale oil production.  In the US it is almost a nationwide project implying creation of more than 1 million of working places. Shale oil and gas production implies almost permanent drilling of new wells because after one year a well is no longer operational. It is very expensive and to make this project cost efficient oil should cost not less than $100 per barrel. In reality the US needs Iran to close the Strait of Hormuz through which shipments of Middle Eastern oil and gas are carried out. This would lead to a great deficit.”

. . . .

Experts point at one more aspect of using the Iranian factor for the benefits of the shale oil project. Until recently the US ecologists have been pointing at catastrophic consequences the mass development of shale deposits may lead to. The wells are located deep underground in porous fields.  In order to prevent their disintegration the oil producers pump in mixture of water and chemical substances there, a professor Alexei Yablokov says:

“The production of shale gas may provoke earthquakes. Another problem is contamination of ground waters, which may spread quite far. There have been constant disputes in America whether to allow such production in the state of New York and states.”*

Talk about an inversion of the truth.  As a large consumer of energy, and a net importer, the US does not benefit as a whole from higher oil prices–even though there are some that do.   Like the 400,000 people in North Dakota.  Thus, contrary to the assertion, it is risible to argue that the US would stoke conflict with Iran to benefit . . . North Dakota.

Moreover, as a large exporter that is dependent on high oil prices to fund the government and generate the rents that its governing elites siphon off, Russia, and those who rule it, definitely have an interest in high oil prices.  Russia is the main beneficiary of unrest in the Middle East.  I pointed this out years ago, as have many others.  It clearly has an interest in fomenting conflict, and its actions in the Middle East are clearly consistent with this interest.  Indeed, its actions vis a vis Iran–including its support for Iran’s nuclear program, and its running diplomatic interference for IRI (especially at the UN)–make perfect sense from this perspective.

Russia has every incentive to keep the pot boiling in the Straits of Hormuz–but not to the point of boiling over.  That’s a very dangerous game to play.

American options in Iran are limited, and there are many risks involved.  There are many conflicting goals.  But one thing I can say categorically is that fomenting tension to keep the price of oil high is not one of them.  That is adverse to American interests.  (I also consider it ironic that with respect to Libya and Iraq, Russia and other anti-American voices–including some American ones–claimed that our policy was driven by the desire to get our hands on cheap oil.  So which is it?)

No, fomenting tension to keep up oil prices is Russia’s job.  It benefits economically from this.  It also benefits from having the US tied up in another conflict–or potential conflict.

But as with the farcical assertions regarding Phobos-Grunt (see the immediately preceding post), this type of agitprop is an indication of what we can expect out of the next Putin administration.  Not even Obama will be able to claim with a straight face that the Reset is only resting.  It will be dead, dead, dead.  Well, it is already, but its demise will be undeniable.

*To illustrate the article’s tenuous grip on reality, it states: “In New York and Texas the authorities finally banned shale hydrocarbons production.”  That’s news in Texas.  And in NY too, for the fracking ban was lifted–though very tough restrictions remain in place.

It’s January, so that means that the Ukrainians are probably not singing the Gazprom Song right now.  Instead, they are engaged in their annual gas price battle with the Russian company.  Ukraine wants a lower price, but Gazprom says no.  OK, says Ukraine, if you won’t lower the price, we’ll take half the agreed to quantity.  No to that too, says Gazprom: you have a take or pay deal that obligates you to take at least 80 percent of 52 bcm.

The parties are due to meet for decisive negotiations on Sunday.  But one cannot rule out another gas war.

And Ukraine may in fact be singing the Gazprom Song after the negotiations are over.  Vladimir Socor claims that Ukraine’s president Yanukovich and his Party of Regions are preparing to cede control of Ukraine’s gas transmission network to Russia in exchange for a break on the gas price:

President Viktor Yanukovych and his government are setting the stage, politically and legislatively, for transferring Ukrainian pipelines to Russian control, in a package deal with Gazprom. The president and government wavered and agonized at times, but are now actively preparing Ukrainian public opinion for an imminent deal. In the endgame of negotiations, Ukraine’s governing Party of Regions is rushing legislation through parliament to authorize transfers of gas infrastructure. Leasing pipelines to Gazprom is one form of transfer, out of several under consideration.

Transferring ownership or control of assets in this way, in exchange for a pie crust promise on future gas prices, would be utterly foolish.  But don’t put it past the Ukrainians, whose government (to use the word quite loosely) is utterly dysfunctional.

Ukraine denies this:

Ukraine will not sell its gas pipeline network to Russia in exchange for supplies of cheaper gas, Ukrainian Energy Minister Yuri Boiko said on Friday, ruling out a solution long suggested by Moscow.

He pledged, however, to honour the existing deal, which Ukraine considers unfair, if talks on revising it fall through.

Ukraine, which depends heavily on Russian gas supplies, has sought for over a year to renegotiate a 2009 deal with Moscow, which it says sets an exorbitant price for the fuel. But talks have failed to produce any results so far.

“The issue of (a pipeline network) sale has never been on the agenda. We dismissed it immediately,” Boiko told reporters. “If we find a model that satisfies both sides, we will make a deal. Otherwise we will work under the existing contract.”

But as any investment banker can tell you, there are ways of structuring deals so that they are effectively sales even if they aren’t called such.  (Hence the Tymshenko’s government specifying of a large list of things the Ukrainian government wasn’t permitted to do with its pipes–the law that Yanukovich is trying to change, according to Socor.)

Besides, the relationship of the Ukrainian government to the truth is thoroughly Sovok (as a one time commenter was fond of pointing out), so Boiko’s protestations are hardly credible.

We’ll see what happens on Sunday, but it’s unlikely to be good–except, perhaps, for Putin, who has coveted Ukraine’s gas transport network forever.   The Ukrainians have done a masterful job of painting themselves into a corner.  Europe is distracted by its own issues, right now, but Yanukovich has completely alienated the EU regardless with his prosecution of Tymshenko.

So, the Ukrainians stand cold and friendless.  Perhaps they should start memorizing the words: “Let’s drink to you, let’s drink to us, let’s drink to Russian gas.”

From #1 SWP daughter: Young Vladimir Putin Looks Totally Like Tom Riddle (a/k/a Voldemort):

Speaking of Putin.  He is reaching new levels of chutzpah in his campaign.

A couple of examples.  First, Russia to Be a Top Country for Business in 10 Years:

“We need to outline a quite clear goal – to become one of the world’s leading countries with the best conditions for entrepreneurial activity within ten years,” Putin said at a congress of Business Russia, a national association of businesses.

“This is a very difficult task, because it is rather hard to eradicate and wipe out corruption, which, unfortunately, is part of the culture, or its absence,” the premier said.

Vladimir Putin, anti-corruption campaigner.  Mind boggling.

Second, another related piece: “Business must return from off-shore ‘shadows‘”.  This story included this bit:

“There should be absolute clarity concerning the structure of ownership, with real shareholders and beneficiaries,” said Putin.

“This is a key indicator of how civilised the business climate is, the maturity of the economy and the level of responsibility of the business community,” he added, saying his comments did not only refer to the energy sector.

Hey.  Speaking of the energy sector and clarity regarding “real shareholders and beneficiaries”, how about shining some light on Gunvor!  I’m sure that would be quite interesting.

And for an extended treatment as to why Putin lecturing about corruption as anything but a practitioner, see the new Milov, Nemtsov, Ryzhkov, and Shorina paper.  (Five, four, three . . . )

I’ve opined for over two years that China’s economy is very fragile and deceptively robust: I characterized it as a “Michael Jackson economy” kept functioning by doses of artificial stimulants, which postpone the ultimate adjustment, but which make that reckoning all the more harrowing when it comes–as it must. There have been other advocates of this view, notably short sellers like Jim Chanos, but until relatively recently the consensus was that China would slow gently, and experience a “soft landing”.  In recent weeks, however, the consensus is clearly shifting towards the alternative view that China is increasingly vulnerable to a big fall.

This is best illustrated by the fact that nearly polar ends of the opinion spectrum, from the WSJ to Krugman, have agreed that China’s situation is increasingly fraught.

The previous optimism by some was actually the primary reason for my pessimism.  The Tom Friedman School of Sinology, which has far too many adherents (including many corporate types here in the US), argues that China’s centralized policymaking system will allow it to respond to crises in a forceful, technocratic way unhindered by the political messiness that has interfered with economic policy in the US, and particularly Europe.

Alas, fascism always has its admirers, not least among the smart set opinion makers and the board rooms of large corporations, where it is all to common to think of economies like companies run by managerial fiat, rather than as spontaneous orders coordinated via the price system and other forms of market contracting.

To me, this centralization is a bug, not a feature.  Centralized resource allocation invariably leads to substantial distortions.  In China’s case, the extreme orientation towards investment in driving GDP growth should be a clear signal of misallocation.  In 2008 and 2009, China responded to the crisis by dramatically easing credit and encouraging investment in infrastructure and housing.  A lot of money got spent, and a lot of measured GDP was created, but it is increasingly doubtful that the true market value of these investments, which would represent the actual value created, is anywhere near the amount invested.  The decline in housing prices is one symptom of that.  The fact that many big infrastructure projects, like the glittering high speed rail systems that Obama marvels over like an 8 year old watching a Lionel whiz around the track on Christmas morning, are unable to cover even variable costs, let alone generate a return on investment, is another.

Governments can spend, or distort prices to encourage spending.  Creating actual value from the spending is something else again.

Moreover, China’s supposedly wise planners have created a financial system that would make Rube Goldberg proud, and which exhibits all the pathologies and brittleness of past systems that have collapsed in ugly crashes.

The Chinese have constructed a system that is intended to (a) channel savings via big banks for lending to the kinds of companies and projects that the government wants to support, and (b) generates spreads for banks to help them generate income to overcome the consequences of past bad investments.  This system involves paying very low rates to depositors who have limited investment alternatives.  Most Chinese depositors actually earn negative real returns.

But these price controls–like all price controls–encourage efforts to circumvent them.  In China’s case, investors looking for higher returns are circumventing the formal banking sector by directing capital to the informal shadow banking system. This system utilizes a crazy quilt of products like wealth management products, letters of credit, and bank acceptances.

Much of the capital raised via the shadow banking system has been channeled into real estate, loans to companies rationed out of the formal banking system as the result of government policies to try to rein in inflation and speculation, and to lending to local governments with extremely dodgy finances (being heavily dependent on real estate sales for funding).  Thus, the asset side of the balance sheets of these entities is extremely risky.  The liability side is, moreover, very fragile and prone to runs–just like the shadow banking system in the US was in 2007-2008.

Put this together and you have a very big financial Humpty Dumpty teetering on the verge of a very big fall: risky assets funded with run-prone liabilities, and all that operating in the financial shadows.  Those who marvel at the wonders of a state dominated system (e.g., the Tom Friedman China cult) are not worried.  They are serenely confident that all the Party’s horsemen and all the Party’s men will be able to put Humpty Dumpty back together again.  This optimism is passing strange, given that CCP policies are primarily responsible for Humpty Dumpty’s existence, and his parlous state: policies that encouraged the rapid expansion of a shadow banking system, and which stimulated extremely investment-intensive growth with little regard to the economics of the projects this stimulus spawned.

What could give Humpty a push?  Well, given China’s export-orientation, the most obvious candidate is a slowdown in Europe which appears increasingly certain.  The main open question here is how severe the contraction will be.  That depends on the wildly unpredictable (because it is primarily politically-driven) outcome of attempts to address its sovereign debt crisis.  But it is also possible that Humpty could fall purely due to internal factors, without an external push.  The existing balance is very precarious.

As I’ve mentioned before (mainly in the comments), it is very difficult to predict the timing of these things.  But it is plain to see that Humpty is teetering, and that the odds of a fall are appreciable.

This helps explain why open interest in very low strike crude oil puts is increasing dramatically: if Humpty does fall, it will be extremely bearish for commodities.  (Deep-out-of-the-money-calls on crude are also quite popular now, reflecting the situation with Iran.)

So I remain pessimistic on China.  It is interesting to have much more company in that view.  Interesting, and at the same time a little unsettling: having Krugman on the same side is always reason for a rethink!

Two stories about how proliferating supplies of nat gas are undermining Gazprom.

Remember how Gazprom would always attempt to bring Europe to heel by threatening to sell gas to China?  That’s not gonna work so good anymore.

Why not?

First, Turkmen gas:

China will become a major gas importer in the near future but is unlikely to sign a deal with Russia’s Gazprom and is instead looking to Turkmenistan and perhaps even the United States to cover its needs, a report said on Thursday.

China plans to increase gas in its energy mix from 3 percent to 10 percent by 2020 and has secured its gas import needs until around 2018, but after that needs to strike new supply deals to feed a rising appetite for natural gas.

“Judging by the apparent lack of any progress on the gas pricing issue, it seems Beijing is in no particular hurry to sign any gas contracts with Gazprom,” French bank Societe Generale said in a research note on Thursday.

An agreement on Russia’s gas deliveries to China, the world’s largest energy consumer according to the International Energy Agency, would boost Moscow’s efforts to reduce its export dependency on the European market, which currently provides around 80 percent of Russia’s gas export revenues.

But Moscow and Beijing have haggled for five years over the commercial terms for any deal.

“The various measures China has taken to secure its imports reinforce our view that China would first look into any potential U.S. LNG (liquefied natural gas) deal before reverting to Gazprom,” SocGen said.

In November, China signed a deal with Turkmenistan to increase its planned supply of gas to China by 25 billion cubic metres (bcm) of natural gas, to a total of 65 bcm.

SocGen said China’s apparent policy meant that Gazprom’s exports were likely to remain focused on Europe, and that this “leaves Europe well supplied until 2016 at least.”

But I’m sure that contract with China will be signed any day now!  Lucy Sechin said so!

There is more irony here given how Gazprom has done everything to keep Turkmen gas from going to Europe.  Where “everything” includes blowing up piplelines and threatening war over the Trans-Caspian pipeline.  (Nice little country you have here.  Pity if it ended up like Georgia.  A threat, by the way, that gives the lie to the Russian justification for the 2008 war.  Just one of many recent revelations and statements that belie the official narrative.)

Second, favorable prospects for shale gas production in China:

PetroChina has discovered shale gas in China’s Sichuan province, confirming that the energy-hungry country is sitting on vast reserves of this unconventional fuel source.

PetroChina, the listed subsidiary of Chinese oil and gas producer CNPC, told the Financial Times it had drilled about 20 wells in its shale gas acreage in southern Sichuan province and that initial results had been positive. “The wells are producing more than 10,000 cu m of gas per well per day,” said Mao Zefeng, PetroChina senior assistant secretary to the board. “We are still assessing the exact size of the potential reserves.”

China does not yet have any shale gas wells producing commercially, but several companies have exploratory projects underway, including Sinopec, PetroChina, Royal Dutch Shell, BP and Chevron. China has more shale gas reserves than any other country in the world, with 1,275tr cu ft of recoverable shale gas reserves, according to estimates from the US Energy Information Administration. That is enough to supply China for more than 300 years, based on current consumption levels.

The dam is cracking.  The water is rising.  On all sides.

Whenever I need a good laugh I look around to see what Gazprom says about the perils of spot pricing mechanisms for gas.  (OK.  I confess.  My sense of humor is, uhm, idiosyncratic.)  And they seldom disappoint!

Like this gem:

Spot prices, which European customers have asked the Russian gas export monopoly to factor into long-term contract prices, should play a “subordinate, balancing role,” said Sergei Komlev, head of pricing and contract formation at Gazprom’s export division.

Gazprom supports “the existing dual hybrid pricing model,” Komlev said today at a conference in Moscow. Switching to 100 percent spot indexation or de-linking oil and gas prices “is unacceptable to gas producers because it will create opportunities for predatory pricing.”

Uhm, just how would that “predatory pricing” work, exactly?  Predatory pricing involves the sale of a product at below marginal cost with the intent to drive competitors out of the market.  Once exit occurs, the predator then raises price to supercompetitive (and perhaps monopoly) levels.

The problem with this strategy, as appealing as it is to the economically illiterate (well, I am talking about Gazprom management, so . . . ), is that (a) it can only work under very special conditions, (b) these conditions unlikely to hold in practice, and (c) the documented examples of successful–or even attempted–predation are virtually non-existent.  And I would say that the use of the modifier “virtually” is unduly cautious.

Predation is unlikely to work in an industry as unconcentrated as gas–and if anyone is in a position to be a predator, it is Gazprom, as the world’s largest producer with the world’s largest reserves.

But the more basic problem is that predation can’t destroy the competitor’s productive assets.  For instance, if a big gas producer tried to charge a below-cost price in an attempt to drive Gazprom out of business, Gazprom’s wells and pipelines would still exist, and could come back on line as soon as the predator attempted to raise price.  Meaning that the predator would lose money driving down prices, but would never be able to profit by raising them to supercompetitive levels.

In other words, predation is usually a great way for the predator to lose money.  Which is why it is more a figment of heated imaginations than an economic reality.

As for empirical examples, Rockefeller’s Standard Oil was the poster child.  Ida Tarbell–the daughter of a refiner that lost out in competition to Rockefeller–alleged in various muckraking articles and books that predation is how Standard Oil was built.  But the painstaking, non-muckraking, historical research of John McGee (then at Chicago, and published in the JLE) showed that Tarbell’s characterization was all wrong.  Standard Oil did not engage in predatory pricing.

So, predatory pricing is just another Gazprom bogeyman.  A risible scare tactic employed to defend an increasingly indefensible position.

Gazprom reminds me of the little Dutch boy, holding back the waters by putting his finger in the hole in the dike.  But Gazprom’s problem is that there are more holes than it has fingers.  Just follow the news and you’ll see story after story about gas exploration and development and export just about everywhere in the world.

One interesting development occurred the other day in Qatar.  Russia has downgraded its diplomatic relationship with the Gulf country because of an incident in which a Russian diplomat was roughed up, allegedly when Qatari officials tried to seize the diplomatic pouch he was carrying.

Recently, Qatar and Russia had been singing of the same hymnal with respect to gas contracting practices.  Moreover, Qatar has been Russia’s main interlocutor in discussions to create a gas cartel analogous to OPEC.  Given the proliferation of supply sources, actual and potential, the prospects for such a cartel are dim on economic grounds.  But political friction between Qatar and Russia makes the prospects even more remote.

Given the gravity of the accusation, one wonders what would have been so serious as to lead Qatar to take such an action.  Most likely guess: something related to Iran.  There are many indications that there is a covert war going on against Iran.  The Gulf states are in a cold war with Iran–and maybe it is a little warmer than that.  Russia’s role with Iran has been equivocal, at best.  Under these circumstances, one can readily imagine why Qatar would go after a Russian diplomat.

Regardless of the actual story, political tension between Qatar and Russia is just another hole for Gazprom to plug.