by Alexei Miller

23-07-08 With oil prices at more than $ 140, increasingly bitter discussions have been waged about the reasons behind rising prices. Consumers say the problem is that not enough oil is being produced. Producers blame everything on market speculators artificially inflating prices.
Gazprom believes that the underlying cause of rising oil prices is simply that the market has opened its eyes. Consumers, research organizations and specialists see a significant imbalance between supply and demand emerging by 2012. And that means tomorrow!

Investments to cover this gap should have been made back in 2005 but since they weren't, this "hole" is pushing oil prices higher, with the commodity markets providing us with tomorrow's prices today.
It is senseless to blame this on speculators. The function of financial markets rests precisely in their ability to provide the corresponding signals for investments. The question is: How do we respond to these signals and ensure that today's investments in oil and gas do not end up being superfluous or lead to a market collapse?

There is an answer.
Instead of looking to build up production in a linear fashion in response to higher prices, all of the main producers are currently focused on securing the maximum integral economic effect over the long term.
Here are three current examples:
-- Within the frameworks of the Gas Exporting Countries Forum, we will create a global gas balance. This will provide us with answers to when, where and how much gas should be produced.
-- Algiers has announced its intention to gradually shift production of gas over oil. Russia may follow this path of trying to achieve a long-term balance between oil and gas production in accordance with the availability of resources. Russian oil production has stabilized and will remain around today's levels for the coming years.
-- The United States is acting in a similar manner. Although the Bush Administration is calling on the main oil exporters to boosttheir production to stabilize prices, the United States itself is not doing much along these lines. We are certain that none of the companies operating in the OPEC nations -- or, for that matter, in Russia -- would refuse an opportunity to boost production by developing US fields.

We believe that traditional classification of oil and gas producers has become completely outdated. The "Seven Sisters" ruled the entire global market for some period of time. Today we may speak of a new paradigm of the global oil and gas market where the "Seven Rich Brothers" have emerged.
Companies are now differentiated according to whether they "command" resources. Steady growth of the market capitalization of companies such as Gazprom and PetroChina demonstrates that investors have come to accept this paradigm.

Another important point is the linking of oil and gas prices. Currently the price of gas in long-term contracts is indexed to the price of oil products. Some would say that all we have to do is decouple these prices and at least one of the important energy resources -- gas -- will become more accessible to consumers.
The growing spot Liquefied Natural Gas (LNG) market, where non-contracted gas is sold for immediate delivery, allows us to test this theory. Even now we are seeing that in spot deliveries, the price of gas is already approaching the price of oil and is expected to exceed it in the near future. Secondly, in swap deals, Europe is already starting to lose the competitive battle. Qatar, for example, has redirected a part of its spot LNG deliveries from European to Asian markets where prices are higher.

So consumers are forced to decide which of the alternatives scares them more -- high prices or an insufficient supply of energy. Would active efforts to bring new suppliers onto the market help change the pricing environment?
Countries in the Caspian region are constantly being bombarded with calls to create new gas transmission routes that bypass Russia, supposedly to benefit consumers by improving competition. Trying to bring new suppliers on the market in future, this has not brought new gas to Europe today. But competition between buyers in the Caspian region has already resulted in a sharp rise in prices. We called it the "Caspian paradox".
Liberalization favours the consumer only as long as supply exceeds demand. But energy reserves are being depleted and access to new resources is constrained. Gas ends up being more expensive on the liberalized British market than it is under long-term contracts in Europe. And this price gap will grow.

So, finally, what is the solution?
We believe that the success rests in organizing vertically integrated chains that run from the point of production to the end user, with each link in the chain representing a joint business between energy resource producers and consumers.

Alexei Miller is the chief executive of Russian gas export monopoly Gazprom, the world's largest gas producer, a supplier of a quarter of Europe's gas and the world's thirdmost valuable company.