When you fill up your tank this summer with $4 a gallon gas, you can thank Russia.
In October 2008, when oil was in the process of falling in price from $147 a barrel to $32, (in December 2008), Moscow was frantically trying to get OPEC to restrict supply, and jack prices back up to record levels. The reason? Sixty percent of Russia's annual budget comes from oil and gas revenues. Seventy percent of its exports are oil and gas.
When a barrel of oil costs nearly $80, the Kremlin is relatively flush with money. At $150 a barrel, as in July 2008, the former Communists start to believe in God: They have enough walking-around money to subsidize arms sales to North Korea, Iran and Venezuela, invade parts of Georgia, intimidate its neighbors such as Ukraine, and underwrite campaigns against missile defense as they did in Poland and the Czech Republic.
But when oil is at $32 barrel, Russia is broke.
In late August and early September 2008, the Saudi government pledged to the Bush administration that oil production in the Kingdom of Saudi Arabia would be pushed upwards of 2 million barrels a day greater than the allowable OPEC targets. The world's financial system was teetering on the edge of collapse; anything to bring down sky-high oil prices might save the US and the economy of the industrialized world, and with it, the trillions invested in world markets, an important part of which was Saudi owned.
When, on October 21, 2008, the Director-General of the Organization of Petroleum Exporting Countries, Abdalla Salem el-Badri, went to Moscow, OPEC wanted Russia to cut production. Russia said no.
Moscow then accused the Saudi government and OPEC of vastly exceeding their quotas for oil production, thus pushing down the price of oil. Although true, the head of OPEC countered by noting how ironic that Russia—although not a formal member of OPEC—was also pumping oil as fast as it could. The Russians brushed aside the charge, claiming that to meet revenue targets they were being forced to pump more and more oil at a lower and lower prices, and thus were robbing themselves. They needed, the said, a commitment from OPEC not only to live within its production quotas but to lower those quotas, as well.
OPEC's chief officer left without an agreement from Moscow. A few weeks later, on November 15, 2008, for the first time, one of the Saudi owned VLCC, (very large crude carrier), the Sirius Star, carrying two million barrels of crude oil, bound for the United States, was hijacked 450 nautical miles off the coast of Kenya. While tens of thousands of ships of all kinds ply the waters of the Indian Ocean every year, the ability of Somalia-based pirates to find the VLCC, and to board and capture her, was not a small feat. "I am stunned by the range of it," said the American Chairman of the Joint Chiefs of Staff, Admiral Mike Mullen at a news conference. "The ship's distance from the coast was the longest distance I've seen for any of these incidents."
As we debate whether to drill for more oil and gas, even as we calculate the economic damage to our Gulf Coast from the oil spill, we should probably ask ourselves: How much power to we want to give Somalia based pirates and their allies over our economy?
According to US military sources, one does not just "find" a ship hundreds of miles from shore. One needs "real time intelligence." Such an operation had to have had the help of a sophisticated nation state. Only two could have doine the job: Russia or the United States.
According to maritime insurance sources, the pirates were highly organized, with a command structure out of the Russian Navy. Apparently, with ocean-going techniques taught at Russian naval academies, Cold War graduates of these academies who were looking for work were training some of these Somali-based pirates -- and the "pirates" were getting quite sophisticated.
Up to this point, most Indian Ocean piracy had been regarded as straight criminality. Law firms were hired to discuss ransom demands with the owners of vessels or cargoes. The headquarters of the "marine pirates" was some twelve miles inland in Somalia; and fisherman and their boats were often kidnapped by these pirates and used to get near freighters. As one Department of Defense expert said, noting a tribal component, "many pirates are nothing more than modern-day ocean-borne Bedouin tribes stealing lost camels disguised as freighters."
The going rate at that time for ransoming an ocean going freighter was roughly $50,000. The bandits, however, contacted the Saudi Minister of the Interior and demanded $10 million. They also asked that goats be delivered to the ship so they could eat. The ransom was then delivered by airdrop-parachute, and the Sirius Star was handed back to the Saudis. While escaping, however, the pirates' small boat capsized, and five of the eight drowned as bundled $100 bills floated around the super tanker.
Within a few months, Saudi Arabia and OPEC had announced four consecutive production cuts, and daily oil production had in fact been significantly curtailed. By early spring, with the price of crude oil was back to over $80 per barrel, OPEC announced that no further rates cuts would occur, and that production would be "steady state".
Is the nascent world economic recovery going to last with oil at its current price?
And will the pressures from an increasingly authoritative Russia keep oil prices high, choking off needed economic growth and providing the U.S. with a possible double dip "recession"?
Many have said our relationship with Moscow has much improved. Maybe. But remember when the Secretary of State proudly presented to the Russian Foreign Minister a bright red button inscribed in Russian with the word "Reset" -- an appropriate phrase for a new beginning -- Foreign Minister Lavrov politely noted that the Russian phrase actually used on the "reset" button translated to "overcharged."
With a barrel of oil at near $80, the US consumer is paying annually $400 billion more than what we would pay at $30 a barrel.
That folks, is a lot of money.