Several years ago I missed an opportunity to double my money on BP shares when the news of the Gulf of Mexico blowout broke. There were absurd predictions in the financial press about possible US shoreline damage, calculated on the lines of ‘multiply the Exxon Valdez by X”. I knew this was nonsense because the Gulf of Mexico seabed leaks oil and gas continuously, resulting in an ecosystem that feeds on the stuff. If a big leak occurs, oil-eating bacteria multiply up very fast to consume it relatively harmlessly, and that’s exactly what happened.

Now, although with less certainty, I suspect the technical ignorance of the financial-political class is misleading them once again. Earlier this week I talked to an expert in oil/gas pricing who discounted any implications for Europe of the new Russia-China gas deal because it would ‘take years to put the relevant infrastructure in place’. When I told him the Russians already had pipeline to near the Chinese border, probably built on spec for a never-consummated deal, he had not heard of it.

Later in the week I talked to a Chatham House expert who also discounted worries for Europe, pointing out that Russia badly needs foreign currency, and claiming that the Chinese would never take more than a small amount of gas from Russia anyway, as they would be too wary of Putin’s power to turn the tap off.

Both arguments may be specious. A pipeline can be built in many places at once. China has a big surplus of civil engineering capacity, notoriously they have already built towns with no occupants and greatly underused roads. Building pipelines in double quick time would be much better than makework, the Chinese might reckon such work a benefit rather than a cost.

The Chinese also have an urgent requirement for fuel less polluting than coal, to relieve serious air pollution in many cities. If gas became available, they would mothball the coal-fired plants not unbuild them. To avoid structural unemployment, they would reduce coal production at most gradually, creating a big strategic reserve. Putin would have no blackmail hold, because they could just restart the coal-fired stations, and of course Putin would know this.

Putin is not feeling over-friendly to Europe. He has the Realpolitik power to turn the gas tap off any time he wants (at the moment the gas to Europe goes through pipelines in trouble-hit Ukraine). Putin wants an alternate market for his gas as badly as the Chinese want to relieve air pollution. Europe might find itself with an energy crisis quicker than it expects.

Scroll down here http://www.washingtonpost.com/blogs/worldviews/wp/2014/05/21/map-what-the-epic-china-russia-natural-gas-deal-looks-like/ to see a map of Asian pipelines, courtesy of The Washington Post.


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