Andreas Whittam Smith: Putin's energy threat should be risible

When I read what Russia's prime minister, Vladimir Putin, had to say a few days ago about the pipeline that would transport gas from Russia to western Europe via the Baltic Sea, I thought here we go again, more bullying.

Mr Putin had suggested that if Europe did not show sufficient support for the project, his country would pull out. "Europe must decide whether it needs this pipeline or not. If you don't, we will build liquefaction plants and send gas to world markets. It will be simply more expensive for you." The correct reply to this threat is not to bow the knee but to say "go ahead Mr Putin, do whatever you think best".

If this sounds daring, it is because it is not widely understood that while Russia is a major exporter of gas to European energy markets, it is far from dominant. If we take all sources of energy, we find Russian gas accounts for just 6.5 per cent of the European Union's primary energy supplies, a share that has barely changed since 1990. Furthermore Russia's market share of gas imports has halved since 1980, from 80 per cent to just over 40 per cent.

It is more revealing, though, to compare the natural gas market with the oil market. Why does the former give rise to political considerations whereas the latter does not? Think of the world's large oil suppliers, from Venezuela to the countries of the Middle East to Indonesia. Not one of them issues threats based on denying supply. Russia is also a significant exporter of oil to western Europe, but it never uses that as an instrument of its foreign policy. Yet it does so with gas.

In a recent publication, the European Council on Foreign Relations provides a revealing analysis of the two cases. As it points out, the explanation lies in the different structures of the oil and gas market and the varying nature of the products. Oil can be transported easily, and it is traded on a global market in which Europe is fully integrated. In the case of a supply disruption, a refinery or large consumer can almost invariably turn to the short-term market. Available supplies are reallocated instantaneously and anonymously.

This international oil market is now 140 years old, but natural gas only got going in the 1970s. In western Europe, trading began in a monolithic way appropriate to the period. State owned, monopoly gas undertakings in France, Germany and Italy, signed separate supply agreements with the Soviet Ministry of Gas. They secured large volumes for 20 to 30 years ahead under rigid contracts designed to support massive investment in infrastructure, especially the 5,000km pipelines from west Siberia to Europe. These contracts were government-to-government agreements, whatever the names on the documents. The system was based on the absence of competition. The idea of a single European gas market was explicitly rejected. Unfortunately not a lot has changed since then.

But we could have a single European gas market tomorrow. The European Commission is always putting forward recommendation to that effect. The result would be that Russia would no longer export specifically to, say, Germany or Italy, but to Europe. The market would shuffle supplies to wherever they were needed. As a trading partner, Russia would then have the same relationship with the EU that Canada has with the US – it would be a neighbour who supplied valuable raw materials. But that would be the end of the matter. A piece of business. No politics.

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