

Russia is still a major player in global energy markets and aspires to leverage its resources to become a global energy superpower. It is the largest supplier of natural gas to the European Union and is using this dependence as a foreign policy tool to drive wedges between European capitals and between Europe and the United States. The Kremlin’s strategy seeks to increase dependence by locking in demand with energy importers, consolidating the oil and gas supply under Russian control by signing long-term contracts with Central Asian energy producers, and securing control of strategic energy infrastructure in Europe, Eurasia, and North Africa. Russia’s strategy also involves extending the Gazprom monopoly to create an OPEC-style gas cartel and increasing cooperation with OPEC.

Russia still outperforms Saudi Arabia – and any other country on the planet as the largest producer and exporter of oil and gas. But the Gazprom’s production decline is a cautionary tale of government mismanagement of natural resources, opacity and corruption. In the Heritage’s Index of Economic Freedom 2010 Russia came 143rd, behind Haiti, but ahead of Vietnam.

Russia possesses the world’s largest natural gas reserves. It has been the leading producer for most of the past 20 years and supplies one quarter of the European market. However, due to the global economic crunch, Europe’s gas prices and consumption declined, and the Russian GDP shrank by about 8.7 percent last year. Gazprom cut back output during the gas dispute with Ukraine.

The U.S. total natural gas production, vital for keeping up electricity output and keeping homes warm, has been boosted by production from onshore shale basins and off shore drilling in the Gulf of Mexico and elsewhere.

The American resurgence in gas production is a case study in the advantages of private enterprise over government monopoly. For decades, American gas output stagnated as conventional gas reserves were depleted. However, in the last four year, natural gas production jumped 10 percent. In the last decade, proved natural gas reserves jumped 45 percent in spite of the rising withdrawals. These phenomenal increases are due to the entrepreneurial application of directional drilling and hydro fracturing technology to shale gas reserves. Dynamic private enterprise applied to marginal resources trumped superior resources throttled by state monopoly.

Now, Russia, go match that.

Co-authored by David Kreutzer.