What was true eight decades ago continues to be true today. The Russian energy sector, despite the near-complete retrogression of the Putin regime, appears to be gaining the upper hand in the global petro-political game. Signs of that dominance can be seen in the ongoing battle over natural gas prices between Ukraine and Russia. In early January, that dispute spilled over into western Europe after the Russian state-owned gas giant Gazprom reduced the amount of gas it pipes into Ukraine. About 80 percent of the gas that European countries buy from Russia is shipped via pipelines that cross Ukraine. On New Years Day, Russian gas deliveries to Poland and Serbia were down by 50 percent. In Austria and France, they were down by a third. In response to the crisis, a newspaper in Germany – which gets 30 percent of its gas from Russia – declared, “You have to be pretty naïve not to recognize this for what it is – pure blackmail.”

Russia was demanding that the Ukranian government agree to a four-fold increase in natural gas prices. Ukraine responded that if Russia raised prices it would halt all gas shipments to Europe. Although normal gas shipments resumed shortly thereafter and Ukraine agreed to a new contract with a doubled natural gas price, the dispute over gas supplies to western Europe is only part of Putin’s pugnacious posing. Witness the expropriation of the energy assets owned by Yukos and the jailing of former Yukos boss Mikhail Khodorkovsky on highly selectively-applied charges.

This “re-Sovietization” of Russia’s energy assets is causing plenty of concern in Moscow. In a recent editorial in the Wall Street Journal, former chess world champion Garry Kasparov summed up the situation: “Putin has made the nation's energy resources the center of his ruling clique that has erased the lines between public and private power and assets. Does the state run Gazprom or does Gazprom run the state?”

But Kasparov’s concerns are not being echoed in Washington. The Bush Administration has quietly ignored Putin’s grand larceny. The reasons for this acceptance is simple: Russia is a net exporter of oil and gas and it’s the only non-OPEC, non-aligned country with the ability to produce significant amounts of energy above and beyond what is now produced by any of the individual members of OPEC. Meanwhile, the U.S., as Fischer pointed out in 1926, is a voracious consumer. And that means that the politics of production in Russia – and the politics of consumption in the U.S. – deserve closer analysis.

Russia’s politics of production

It’s no secret that world oil markets are tight. There’s no spare production capacity in OPEC or anywhere else. Over the past decade, the oil sector, like other industries, has gone to a just-in-time delivery system. Oil producers have learned that having excess production capacity and/or excess inventory simply does not provide a good return on investment. This situation, combined with China’s insatiable thirst for energy of all kinds and the growing global economy, gives Russia enormous power in the global energy market. Why? Russia has gargantuan reserves of both oil and gas. It is an ultra low-cost producer. And it is relatively stable. Corrupt, yes. But stable. And stability is particularly important now that Islamic fundamentalism is threatening the Arab countries that are considered friendly to the U.S., namely Saudi Arabia, Kuwait, and hapless Iraq. Among the other big producers, two countries – Venezuela and Iran – are clearly antagonistic to the U.S. And that takes us back to Russia.

First, a bit of history. The Russian-American oil connection goes back to about 1895, when John D. Rockefeller’s Standard Oil attempted to gain a foothold in Russia. That deal fell apart but Standard Oil continued to have interests in the rich oil fields around Baku. In the early 1920s American oil magnate Harry Sinclair tried to negotiate a deal that would have given his Sinclair Oil Co. control over virtually all of Russia’s oil production from Baku to Sakhalin. The deal fell apart when Sinclair became ensnared in the Teapot Dome scandal. During World War II, Russian oil fields were key strategic targets for both Allied and Axis powers. Shortly after the war ended, Soviet dictator Joseph Stalin hosted British Prime Minister Winston Churchill at a banquet in Moscow. In raising his glass to Churchill, Stalin offered a toast, saying the conflict had been a “war of engines and octanes. I drink to the American auto industry and the American oil industry.”

Stalin was stating the obvious: that without American vehicles – and more important, American fuel – the war might well have been lost. After the war, the U.S.-Soviet relationship devolved into the Cold War, a battle between capitalism and socialism for global supremacy. In the 1980s, Ronald Reagan and his vice president, oilman George H.W. Bush, saw an opportunity to subvert the Soviet economy by flooding the global market with oil, thereby denying them the hard currency needed for their war machine. The two convinced the Saudis to flood the world market with crude. From August 1985 to early 1986, Saudi Arabia’s output went from two million barrels per day to about five million barrels. Prices plummeted, going from about $25 per barrel to a low of $9 per barrel by July 1986. As crude prices fell, the Soviet economy – almost totally dependent on the revenues from its oil exports -- went into a fiscal crisis from which it never recovered.

That flood of oil swamped the Soviet Union. And in 1989, the Berlin Wall came down. The Iron Curtain melted away and along with it went the old Soviet Union.

The first modern-day Russian politician to understand the importance of the oil business was Boris Yeltsin. As Russia’s president, Yeltsin recognized the need for economic activity and in particular, the need for revenue. That realization led to one of the biggest giveaways in modern business history: the privatization of the old Soviet oil infrastructure, which allowed a few businessmen to buy extraordinarily valuable assets for pennies on the dollar. These new petro-oligarchs quickly became household names in Russia and in global business circles. They became known, not necessarily for their business acumen, but the profligate lifestyles.

Warts and all, Russian oil privatization did accomplish at least some of its goals. It created lots of business activity. The Russian stock market, dominated by oil companies, soared and foreign investment surged. But the growing pains were too much to handle. Within a few years, the country’s economy collapsed and Yeltsin passed the reins to an ex-KGB boss with no desire for glasnost and perestroika, or any other types of reform. His name: Vladimir Putin. From the very start, Putin desired a new statism -- re-Sovietization by any other name.

While the Soviet Union licked its wounds, the United States enjoyed 15 years of euphoria and self-congratulation. After all, wasn’t the collapse of the Soviet Union and the emergence of the United States as the sole world superpower proof of America’s superiority – both moral and economic? It was a heady time, with technological innovations, a communication revolution (eventually marred a bit by the dot-com implosion) and a seemingly endless stock market bull run.

But underlying this U.S. economic boom was another boom: between 1990 and 2005, domestic oil consumption increased by more than 20 percent, from less than 17 million barrels per day to over 20 million barrels. And the key statistic is this: imports went from 8 million barrels per day to some 14 million barrels. The first Gulf War was fought in 1991, and although it was supposed to restore the “legitimate government of Kuwait,” the oil supply connection was never disguised. The Middle East and the rest of the world kept producing oil in excess of demand and in 1998, after the “Asian economic flu” and a short-lived reduction in projected demand, the price of oil collapsed to $12 per barrel.

The oil fortunes of the United States and Russia met again shortly thereafter. The price did not stay at $12. Within a few months it shot to $30. And while it briefly fell back to below $20 per barrel in 2002, it has been climbing almost continuously ever since, topping $70 a few months ago and persistently staying around $60. The likelihood of the price testing $100 is much higher than of it dropping to below $30.

Meanwhile, the re-emerging Russian bear is creating energy alliances that allow it to influence countries from the Bering Strait to the Atlantic. And Putin is using Russia’s vast resources to get more influence. Consider the following facts:

• Next year, Russia’s Duma is expected to ban foreign-owned companies from exploring or developing domestic oil fields and other key mineral resources. That will greatly limit the ability of companies like ExxonMobil, Shell and Chevron from getting a firm foothold in Russia.

• The Russians are building a $15 billion pipeline that will carry Siberian crude to Asia, and particularly to China. Expected to come online in 2008, it will significantly boost Russia’s regional influence.

• The Russians are building a 700-mile pipeline under the Baltic Sea which will carry natural gas to Europe. The new pipe will allow Russia to bypass both Ukraine and Poland, who have been bickering with Russia in recent years. It will give the Russians increased leverage over Western Europe while also giving them more pricing power over Ukraine and Poland.

• State-run Gazprom has teamed up with several foreign partners to develop a vast Barents Sea gas field whose production, converted to liquefied natural gas (LNG), could begin supplying the U.S. market by 2010.

• Russian oil giant Lukoil – which is now 20 percent owned by ConocoPhillips -- has entered the U.S. retail market and is now selling motor fuel in the eastern U.S.

• Gazprom owns its own TV station and its own newspaper. In mid-2005, Gazprom acquired control of the Izvestia daily newspaper, one of Russia’s most prominent publications. Four years ago, Gazprom bought the television station NTV, which had been a frequent critic of the Russian government. During the recent row with Ukraine over gas pricing, NTV was acting as Gazprom’s PR firm, breaking into its news programs to air live footage of Gazprom chief Alexei Miller threatening to cut off gas supplies to Ukraine.

Of course, we could provide a much longer list of projects that show how Russia’s energy reach is expanding. And that reach is expanding even as Putin’s grip on the energy sector is tightening. There are recurring rumors that Putin is planning to leave the Kremlin when his current term expires. And upon retirement, Putin allegedly plans to become the chairman of the world’s largest gas company, Gazprom. In other words, Putin sees the Gazprom job as the only one likely be more powerful than that of Russia’s president.

Despite this increasing -- let’s call it what it is – socialist state control, foreign energy companies can’t stay away from Russia. In July, Shell agreed to give Gazprom a 25 percent stake in Sakhalin-2, the world’ largest liquefied natural gas project, in exchange for a 50 percent stake in another Russian field, Zapolyarnoye Neocomian. And ConocoPhillips, rather than being scared off by Putin’s power grab, decided to increase its stake in Lukoil from 15 to 20 percent.

Alas, Bush appears unconcerned about Putin’s grabbing of Yukos and his jailing of Khodorkovsky. After a February 2005 meeting with Putin in Slovakia, Bush told reporters that he’d reminded Putin that “it was very important that capital see rule of law, that there be stability, there not be any doubt about whether or not -- if somebody invests, whether or not the laws change. And I think Vladimir heard me loud and clear, and he explained why he made decisions he made.” Bush did not elaborate.

Meanwhile, back in the United States, there’s little concern about production. Instead, it’s all about consumption. The U.S. now annually consumes about 26.5 barrels of oil per capita, compared to just 15 barrels for citizens in the European Union and about two for the average resident of China. Add to that consumption a deep-seated love/hate relationship and ignorance on the part of its citizens about the energy business and its role in the American way of life. Stir in a few opportunistic politicos who blather on and on about “energy independence” and it becomes clear why America finds its options limited when dealing with Russia.

Consider the following:

• Between 1988 and 2004, the average fuel economy for all light vehicles in the U.S. fell from 22.1 miles per gallon to 20.8.

• In 2004, the average light vehicle in the U.S. fleet weighed 4,066 pounds -- nine pounds more than the average vehicle weighed way back in 1975.

• Residential consumption of energy is rising steadily. In 1987, the average home in the U.S. used about 177 million BTUs of energy per year. By 2003, that figure was approaching 195 million BTUs.

Amidst America’s energy hunger, there is continuing ignorance about America’s primary energy needs. Few acknowledge that there is virtually no oil consumed for power generation, and virtually nothing other than oil consumed in transportation. Thus, turning down the thermostat or using renewable energies for power generation cannot possibly have any impact on oil use or oil imports. Yet, practically every politician in the United States, from the left to the right, has repeated this feel-good but completely off-base mantra. Furthermore, both the left and the right continue to espouse conservation as a panacea for our future energy needs.

None of this is to say that conservation has no place; far from it. But the enviros present conservation and efficiency as the silver bullet, that will magically reverse the upward trend in energy consumption, something unlikely to ever happen simply because consumers and businesses are always finding new uses for energy such as computers, fax machines, flat screen TVs, the Internet, and well, you name it. Americans measure their wealth by how much energy they consume, not by how much energy they save.

So while the American economy needs more and more energy, “socially responsible” people here and elsewhere constantly put a guilt trip on its citizens. After all, aren’t Americans gluttons? With just four percent of the world population, we use 25 percent of the world’s energy. Missed in this argument is that while a rich country is bound to use more energy, energy use generates wealth. In fact, the United States energy intensity, measured in energy used per dollar of GDP, is about half that of the developing world.

The guilt for energy use is amplified by both the horrible public persona of oil companies (some of it justified, some outdated but still powerful) and America’s environmental sensitivity. Sure, the Exxon Valdez oil spill was bad. And yes, the recent blasts at the BP Texas City refinery were awful. But the oil industry’s environmental record has improved dramatically in recent years. Nevertheless, the dirtiness of oil and its products has stuck in the American psyche and facts – it appears – seldom matter. Drilling is acceptable only in far-off places. Thus, the Bush Administration happily pays oil companies not to develop their proved reserves offshore Florida. Nor is it possible for them to develop their proved reserves offshore California. Nor can the caribou in the Artic National Wildlife Refuge in Alaska be disturbed. Refineries are not to be built anywhere near habitations and even significantly cleaner natural gas facilities are anathema. It takes 600 permits to build a refinery, and NIMBY (not in my back yard) reigns supreme, “from California to the New York island.”

Add the discussion of global warming to the mix and the issues get really messy. Green activists in Europe and the U.S. laud the European countries for signing the Kyoto Protocol, which requires signatories to reduce their greenhouse gas emissions. These plaudits continue even though very few of the European countries who signed onto Kyoto are actually reducing their emissions. As Carlo Stagnaro a director of the Istituto Bruno Leoni in Turin, Italy points out “Only three countries, namely Luxembourg, the U.K. and Sweden, are on track to comply with the Kyoto Protocol.”

Many politicians in the United States, including former President Clinton have berated the present administration for not signing the Kyoto Protocol. Many other countries view the same as yet another indication of America as the irresponsible and insensitive cowboy. Changing the occupant of the White House may bring about a quick signing of the Kyoto Protocol – but not necessarily approval by the U.S. Senate.

Even more insidious is the unsavory oil connection with the disastrous war in Iraq. A flawed venture from the outset that was devoid of any understanding of previous military misadventures in Mesopotamia (doesn’t anyone in this Administration read history? Why didn’t Bush’s generals read T.E. Lawrence before they invaded Iraq?), the Second Iraq War has become synonymous with American oil politics the world over. More than 75 percent of all Europeans believe that America went to war for oil. In the Arab world, that number is over 95 percent.

Amidst this backdrop, the U.S. must now fend for itself in a global energy market that will be increasingly dominated by the 11 OPEC producers -- 10 of which are predominantly Muslim. Thus, the U.S. has few choices but to hold its nose while waltzing with the Russian bear. In February, Bush declared that Russia “has made tremendous progress over the last 15 years. It's an amazing transformation of the nation. And I applaud President Putin for dealing with a country that is in transformation.”

That transformation is not yet complete. And it remains to be seen how long Bush’s applause will last.