A Natural Gas Cartel Involving Russia and Iran?

Iran recently renewed a proposal to create an OPEC-style cartel for natural gas, to include Russia and Qatar. Vladimir Putin has expressed interest in this idea in the past and has recently expressed interest in discussing the idea further.

As has been reported in much of the financial press, the creation of a natural gas cartel is problematic for a few reasons.

1. 
   Natural gas is more difficult to transport than oil. Gas is typically transported through fixed pipelines and is typically sold via long-term delivery contracts rather than on a spot market. As such, the manipulation of supply to control price is problematic. Liquefied natural gas facilities are being built to ship gas, but the planned facilities are scarce and are likely to remain scarce for the foreseeable future.
   
2. Despite having vast gas resources, Iran still imports natural gas for its own use, though the Iranians would like to become major exporters in the future.
   
3. Russia has not been interested in joining OPEC, primarily because it wants to follow an independent energy policy. And Putin has said already that Russia would not be willing to adhere to natural gas supply quotas.
   
4. Qatar is a firm ally of the US. It has no interest in antagonizing the US by forming a gas cartel with Russia and Iran. In fact, Qatar has expressed disinterest in forming a gas cartel, preferring instead to focus discussions via the Gas Exporting Country Forum – a toothless group created in 2001.
   

Given that Iran doesn’t presently export natural gas, that Russia refuses to adhere to supply quotas, and that Qatar continually expressed disinterest, why are the Iranians and the Russians expressing interest in this idea again – and why now?

In its drive toward regional hegemony in the Middle East, Iran is embroiled in multiple disputes with the US – particularly the issues of its uranium enrichment program and its sponsorship of Hezbollah in Lebanon and Hamas in Palestine.

Given its imbroglios in Iraq and Afghanistan, the US is confined largely to diplomatic efforts to constrain Iran. And given that the EU trio of Britain, France, and Germany have failed in their diplomatic efforts to constrain Iranian nuclear ambitions, the US is increasingly looking toward the UN. By discussing the creation of a natural gas cartel, Iran and Russia are reminding the US that Iran has an ally on the Security Council – a friend anxious to use its veto to thwart US ambitions, particularly in light of Putin’s hostile speech given February 10th at the Munich Conference on Security Policy.

Russia is unwilling to support a program of economic and political sanctions with potential to motivate Tehran to abandon its nuclear weapons goals. For that matter, neither is France – as seen by Chirac’s unguarded and widely-reported remarks to the International Herald Tribune during an interview on January 29th.

Might China play a constructive role in deterring the Iranian nuclear program, similar to the role it played in securing the recent agreement with North Korea? Not likely. China’s own drive toward hegemony in Asia requires China to demonstrate that it can exert control in the region, and North Korea’s testing of a nuclear device last October was an embarrassment for China. As a result, China felt compelled to act to secure North Korea’s agreement. No such motivations exist for China in relation to Iran, and Washington can expect no help from Beijing in securing a similar agreement from Tehran.

As a result, I believe there is no diplomatic route to thwarting Iran’s nuclear ambitions. In this case, either a limited military strike is used in an attempt to stop Iran’s nuclear program, or Iran will acquire nuclear weapons. Either way, the Middle East is likely to become less stable, with consequences for the price of oil, inflation, corporate profits, equity markets, and bond markets. But at least we won’t also be worrying about a natural gas cartel.