Federal Government Policy Issues

Why has Russia become engaged in Georgia, what does Russia hope to achieve and what can the US do to counter the Russian incursion?

Russia's incursion into Georgia appears to be a no risk adventure with significant upside gain. The US would not intervene militarily even if the US was able to, the incursion has caused oil prices to jump about $8 bbl/d which financially benefits Russia which produces about 10 million bbl/d and the threat of future incursions by Russia into former Soviet satellites will most likely cause these former satellites to avoid becoming closer to the West than they would like to. There is a possibility that Russia intends to extend their occupation of Georgia so as to control the oil and gas pipelines that run to the Black sea which Russia does not already control. Russia has been working over the last several years to control the energy (oil and gas) transmission infrastructure that feeds the European market which gives Russia more control over the European energy market than Russian produced energy exports would otherwise confer. Russian oil production is forecast to drop off sharply over the next few years but control of the transmission infrastructure will ensure that Russia is still able to use energy as a negotiating tool.

The US might have been able to avoid the Russian incursion into Georgia and negotiated safeguards against incursion into other former Soviet satellites by offering to suspend the US installation of US missiles in the Czech Republic and Poland. Longer term, the best way to blunt Russian assertiveness is to reduce the ability of Russia to use energy as a negotiating tool. The easiest and quickest way to do this is to develop the oil and gas industry in Iraq. Iraq has proven reserves of over 115 billion barrels and much of the country has not yet been explored for energy reserves. Iraqi oil also lies very close to the surface so if cheap to extract and Iraqi production can be developed much more quickly than the deep water fields in Brazil and other places. The holdup in developing Iraqi reserves has been the oil companies demands for a percentage ownership and corresponding profits of the fields which they develop. The Iraqis are strongly inclined to a 100% state owned oil industry. The US should work to resolve this impasse even if resolving the impasse requires that the Iraqis own all of the oil produced. The huge increase in global supply would result in significantly lower oil prices to all countries in general and to the US in particular which consumes about 25% of global oil production. Iraq has increased production by about 400K bbl/d with very little effort but daily oil production at 2.4 million bbl/d is still below Iraqi production before the US invasion of about 3 million bbl/d which was achieved while Iraq was operating under international sanctions.

Labels: oil production Iraq Russia Georgia