Iran and Russia Learn to Dance the Natural Gas Contango

(Contango-a trading term whereby the future price of a commodity is quoted higher than the price for current delivery)

What's worse than one bully? A mafioso of them. And if Iran's Supreme Leader Ayatollah Ali Khamenei has his way, the world's largest natural gas producers might try to form such a mafia to manipulate markets and keep gas prices high and ever higher, just as the OPEC cartel has so successfully and destructively done with oil.

Thanks to the tag-team provocations of President Mahmoud Ahmadinejad and the Ayatollah, Iran has built a nasty reputation as a troublemaker. Now comes word from The Wall Street Journal of the Ayatollah's effort to enlist support for a gas cartel from another of the world's confirmed bullies, Russian President Vladimir Putin (for those who doubt this aspect of his character and have not had a chance to "look deeply into his eyes" may want to consult Mikhail Khodorkovsky. I'm sorry I don't have his telephone number but you may want to look it up in the Chita, Siberia telephone book)

Putin, as you will recall, cemented his iron-fist reputation early last year when he allowed state-controlled Gazprom to turn off the gas to its neighbor Ukraine during a pricing dispute. Unfortunately, the wintertime confrontation also set teeth to chattering farther down the pipeline in Europe, which buys 25 percent of its natural gas from Russia. And for those who may have convinced themselves that Europe's gas shortages were unintentional byproducts of someone else's contract dispute, and not likely to be repeated, Putin shot an arrow through their trusting little hearts when he hinted that European gas users might suffer again if the United States tried to intervene in a subsequent spat between the Kremlin and Georgia.

Given the cast of characters, it's hardly surprising that Khamenei's overture and Putin's reported response that "a gas OPEC is an interesting idea" have caused energy traders and nervous consumers to speculate on the potential for turmoil. Russia and Iran together control almost half of the world's known gas reserves, and Putin has been currying favor with other big producers. He signed agreements with Algeria last year, for instance, and is scheduled to visit Qatar these days.

Qatari Oil Minister Hamad al-Attiya is on record saying that forming a gas cartel to control prices would be tough to do, because most gas-supply deals are locked in for long periods and thus not susceptible to short-term production manipulation. However, Michael J. Economides, editor-in-chief of Energy Tribune, voiced a contrary opinion last March in the online edition of Foreign Policy magazine. Economides, who contends that fast-growing global demand for clean-burning natural gas is changing the landscape, says producers "are certain to organize a natural gas cartel, similar to OPEC." The United States is particularly vulnerable because, historically, we have relied on domestic sources that are dwindling given the current constraints on offshore drilling. Importing liquefied natural gas (LNG) from abroad will be our only other option. Thereby, says Economides, giving the major producers a very strong hand.

But perhaps the most worrisome comment, to me at least, came from Jonathan Stern, director of gas research at Britain's Oxford Institute for Energy Studies. Speaking of an attempt six years ago to set up a gas exporters' organization, Stern complacently remarked to the Journal reporters that the group hasn't "gotten it together to even meet" since 2005, "much less coordinate anything." That said, Stern allowed as how he was "unexcited" by the latest talk concerning Russia and Iran.

Anyone who knows the history of OPEC, as described in my book, Over a Barrel, knows that the cartel was a disorganized, squabbling bunch of oil producers that grew in fits and starts until the day it finally coalesced together. Since then, OPEC has robbed consumers of some $7 trillion. Meanwhile, President Bush mentions our addiction to fossil fuels year after year (six and counting) in his State of the Union address, but almost nothing convincing has been done to break that addiction, constrain our consumption and develop alternative sources of energy in a deeply meaningful way. As we teeter on the brink of environmental disaster, we learn that yet another group of fossil-fuel producers is making plans to pick our pockets. If we are stupid enough to sit by and let them get richer as we despoil the only planet we have, we will deserve everything we get.