In Italy, the matter of natural gas imports and of gas prices have been discussed at length, and the matter was concluded by moving the gas company from ENI (30% of the State) to another public shareholder. It is probably too early to evaluate the effects of this decision, which in my opinion will eventually weaken the Italian position.

In the meantime, another, quite bigger problem is coming up, due to the fight of the European Commission against the Russian gas exporter.Nicolò Sartori has published in IAI working Papers “The European Commission, Issue of Fair Competition or a Foreign Policy
Quarrel? “, which seems to me useful to discuss.  The paper is exhaustive, and quite prudent in its conclusions, ad not too impressed by each contestant’s argument.

The fight comes from the fact that the European Burocracy wants to apply its own theories and “values” not only to the countries that belong to the European Union, but also to everybody who enters in contact with it. They believe they hold a “truth” that must be applied to everybody who trades with Europe. However, other people has different “truth” or, at least, different habits, that they do not consider “truths” but ways to operate and long standing agreements. “Free competition” is one of the “European "“truths" which does not apply to competition among States, but to competition among companies that produce and sells their products on the market.

Officially, people inside Europe do believe this “truth”, but of course they consider it simply as a system that can in certain circumstances work in the favour of the buyer of product and services. Outside the Eurozone, at least one European State does not believe in such a “truth” and, in any case, it considers that the “principles” of the Eurozone do not need to be applied to its own behaviour, inside its own borders, and also when it sells to Eurozone buyers.

The Russians gas producers do not accept competition when they sell large volumes of goods, like gas,  to the Eurozone companies, which sell them to the European distributors, which in turn sell to the final consumers, private or industrial. The Russian do not accept that the European doctrine of free competition between buyers be applied to the gas they are selling. They want to sell at a price that makes sure that they can repay the investments, by no means small, needed to build the giant transcontinental pipe system, and to keep it working.

The buyers of the gas at the end of the pipeline, who participated in building the great lines to Europe, have been, for a while, perfectly confortable with the Russian system .To the contrary, the basic tenet of the “Truth” of the Eurozone is that any commodity, once sold, can be resold, according to the market price of that moment. Of course, in such a situation, the producer of the gas, and the first buyers would not control the price, and might be confronted with final prices that would not allow repaying their huge investments. So, the seller and the primary buyers tend to stick to the doctrine of the fixed price. 

What is, for example, the “doctrine” of OPEC? OPEC does not allow the resale of their crude, and price is dictated by the seller. However, the price of crude oil is, in reality, dictated by   the futures market, which works on two non-OPEC crudes, an American and the North Sea crude. OPEC produces slightly more than thirty per cent of the world crude oil, and tends to follow the results of such a market, also because it has a basic bias towards high prices, which the producers do not dislike.

The rule of not reselling is in any case followed for all the OPEC producers. The Europeans have never dreamt to refuse the present system of crude oil pricing, which is a sort of mix between two possible ways, a “futures” market, and a producer price. It is also true that crude oil is not used as such, it’s a “raw material”; the oil products market is quite large and   the great number of sellers, and of different brands, tends to create at least some elements of competition.

We are in substance, in front of two different interests. The secondary buyers, which do not participate in the pipelines, buy gas from the great international network, and would like a market run on the basis of free competition. However, the competitive area of the gas market in Europe is represented by buyers from the ships bringing LNG (liquefied natural gas) to Europe. They amount to a marginal supply, and do not offer for the moment the possibility of substituting the pipe line gas, sent in much bigger amounts. The matter has also gone beyond the gas market, and touches upon the full relations of the two countries, or Group of countries.

Russia buys European industrial goods, at prices fixed by the European producers, which do not suffer of a great competition in the Russian market; and sells gas at prices agreed with the European long term buyers, which have participated in the building of the great pipelines. An all out fight would embarrass both sides, and   especially the European exporters.The problem comes in part from the great political difference in Russia compared with Europe.  Russia is today the heir of the Soviet Union, which scored  a great military victory; and the structure that won the “Great Patriotical War“, the centralised State with a great leader, seems to be still considered  the best system for Russians. 

The small minority of Russians that got rich in the turmoil following the demise of the URSS don’t seem to have popular appeal .This is a fact that cannot be ignored. In the international relationships you are not really supposed to despise any political structure, especially it is apparently supported by a majority of population.  Now, the E.U. institutions are waging a sort of war against the Russian gas sellers, accusing them of monopolistic behaviour, because it does not make possible the resale of gas brought into Europe. They fight in name of the “freedom of the market”, that takes in the European papers the nature of a “truth”. This attitude, pursued with great continuity, is already creating some obstacles to the normal run of the business.

The Russian government has blocked all information on the matter, which makes everything more difficult. Conditions are building up for a “war of religion “, a war that would very soon forget its origin, and would last until both contenders are on their last leg. Of course, when we talk of “free market” we talk of operators that do buy and sell, but did not contribute in building the pipelines that supply Europe.

So, what to do?  A possible proposal would be to reduce the intensity of the conflict – an idea well supported by Sartori’s paper- and see if and when a market is really created by gas imported in Europe by ship. Today, the volumes imported by that system are not really relevant, and  that  doesn’t  justify  the E.U. hurry : but  the development of  USA export to Europe would perhaps  create a relevant alternative flow of gas, and, possibly, a “future market” for gas, which would in a way or another  be of interest  also of the other gas exporters. We would then have a situation similar to that of crude oil. There, we have producers that do not allow reselling, but at the same time we have a price created by a market which could effectively function as a basic price maker. In the meantime, the intensity of the fight has to be reduced. There is no “economic truth” so important that would justify a fight not only with our largest supplier of a necessary fuel, but also with one of the largest buyers of the European industrial production.