Russia, Iran and Qatar move toward forming gas cartel
Russia, Iran and Qatar move toward forming gas cartel
TEHRAN: Russia, Iran and Qatar made the first serious moves Tuesday toward forming an OPEC-style cartel on natural gas, raising concerns that Moscow could boost its influence over energy markets spanning from Europe to South Asia.
The Russian gas export monopoly Gazprom said it had agreed with Iran and Qatar to form a “big gas troika” and that it should become a permanent body holding regular meetings.
But unlike Oil Minister Gholamhossein Nozari of Iran, Gazprom’s chief executive, Alexei Miller, did not refer to the establishment of a “gas OPEC” after talks in Tehran with Nozari and Energy Minister Abdullah al-Attiyah of Qatar.
“There is a demand to form this gas OPEC and there is a consensus to set up gas OPEC,” Nozari told a joint news conference after talks with Miller and Attiyah.
Europe and the United States have warned against such a gas export body, saying it could pose a danger to global energy security and create room for price manipulation.
Russia, Iran and Qatar are ranked the first-, second- and third-biggest holders of natural gas reserves in the world and together boast more than half of the global total.
“We have agreed to hold regular – three or four times per year – meetings of the ‘big gas troika’ to discuss key issues of gas market developments,” Miller said in a statement issued in Moscow.
“We have a common vision of the goals of the forum and the need to transform it into a permanent organization as quickly as possible to serve the goals of stable and reliable energy supplies in the world,” the statement said.
Major gas exporters have met informally for several years at the annual Gas Exporting Countries Forum, a grouping including also Venezuela, Nigeria, Algeria, Egypt, Indonesia and Libya.
Iran wants to turn it into a more formal body akin to the Organization of the Petroleum Exporting Countries, the 13-member cartel which makes output decisions that can sway the oil price.
“God willing, in the next meeting of the gas exporting countries, they will affirm the establishment of the organization,” Attiyah said.
Gazprom has previously played down the idea of a “gas OPEC,” saying it was not feasible.
Some analysts say any gas OPEC could be expected to share insights on upstream contract terms with investors rather than act on restricting gas supply as the oil OPEC does.
“Surely this gathering of gas exporting countries is to give assurances over gas supply to the world,” Miller, whose country is the world’s largest gas exporter, told the news conference.
Iran is still a relatively small exporter, with U.S. sanctions over Tehran’s nuclear activities slowing development of its gas sector. Major European companies have shelved or scrapped multi-billion-dollar projects there.
Russia has been a reluctant backer of UN sanctions imposed on Iran over its nuclear program, which Tehran says is to generate electricity but which the West fears could lead to weapons manufacturing.
Nozari hailed Tuesday’s talks as a “turning point” in expanding cooperation between Iran, Qatar and Russia and said they had agreed to set up a committee of senior officials.
Miller said the new body would “review projects and implement joint projects. This will range from exploration, refining and selling gas.”
He added the committee of technical specialists would meet in Doha, Qatar’s capital, next week.
Reuters, The Associated Press – October 22, 2008
The Commentary
Russia, Iran and Qatar have announced a cartel which will control 60% of world’s gas supplies. Oligopolistic market structure – where the market for a good is dominated by few large sellers who control the market share and potential entrants face high barriers to entry. Firms are interdependent on each other. Any action taken by one firm will have immediate repercussions on others[1].
A collusive agreement taken to the extreme results in a cartel. Their main aim is to avoid competition, maximize profits and act as one[2]. Similarly, Russia, Iran and Qatar found it in their interest to co-operate with each other and achieve these objectives.
Natural gas is an important consumption commodity used to produce electricity, with gas fired turbines similar to jet engines, to fire steam boilers, to heat water, cook food and numerous industrial purposes. Russia has the largest gas reserves, from where Europe receives nearly half its total gas supply. Iran’s economy is dominated by oil and gas exports which constituted 70% of government revenue and 80% of export earnings as of 2008. Qatar comprises of natural gas reserves exceeding 7000 km�, more than 5% of world total[3].
Gas is the best substitute for oil. It’s cheaper; environmentally much better, has fewer emissions, and so forth. It has become an important fuel. Many people believe that when oil declines, they should simply switch to gas.
Due to oil being supplied at high prices by organizations like OPEC, the demand for gas is high, also because it’s such an important source of energy, and expected to remain inelastic in relation to oil.
The global recession has eroded fuel use, gas futures prices have fallen 70% from their peak; oil futures have fallen 66%[4]. Consumer spending power has decreased leading to a fall in demand for all goods and services. Firms are under-utilizing existing productive capacity thus reducing fuel demand by a large extent worldwide.
Russia, Iran and Qatar could manipulate gas prices according to their benefit and earn abnormal profits. The cartel can achieve this by altering gas supplies, as OPEC has done to control oil prices, thus driving out competitors, new comers through cartelization.
The formation of a gas exchange will be difficult because most natural gas is delivered via pipelines and is not easily shipped like oil around the world to different buyers.
There is no global gas market; gas markets are fragmented and regional. There are no “global” gas prices – they are set individually for each contract (usually long-term, often at prices pegged o oil). Hence, it will not be easy for the potential gas cartel to influence gas prices through restrictive quotas[5]. Through restricting exports, gas-producing countries would only harm themselves by cutting their own incomes.
As per the article, The United States of America and the European Union do not support this cartel formation. The European commission said it would oppose the creation of any organization that could restrict competition and intercept the free play of market forces probably because this cartel could manipulate and charge high prices, harass end-consumers, and earn at the expense of consumers.
When community surplus is not maximized, there is said be market failure [6]. As cartels look to maximize profits, the referred cartel could restrict output in order to push up prices.
The cartel can earn abnormal profits in the short run. Although in the long run, one of the countries could intendedly break the cartel to earn more than its competitors, because of the temptation for members to deceive. Further there is no legal agreement being made, it is possible to earn additional profits at the expense of others.
[1] Mcgee, Matt. Economics – In terms of The Good, The Bad and The Economist
[2] Mcgee, Matt. Economics – In terms of The Good, The Bad and The Economist
[3] http://www.eia.doe.gov/oiaf/ieo/nat_gas.html
[4] http://www.planning.gov.ky/HTML_BODY/PI/PI_Current_retail_prices_Didyouknow%20new3.htm
[5] http://www.neftegaz.ru/en/analisis/view/6562
[6] Ian Dorton and Jocelyn Blink – Course Companion: Economics