Jan 8, 2009

Power in Economic Networks

The colder it gets the more power they have.

Who? Those that control the flow of natural gas used to heat homes, schools and other buildings in the European Union. Currently the two key players in the gas pipeline network that supplies Europe are in a disagreement over pricing, access and many other things. Russia has the natural gas, but the Ukraine is the gas transport gatekeeper on the steps of Europe. Details of the economic tug-of-war are in several places, including one of my favorite blogs.

The golden rule of networks is the same as the golden rule of Real Estate -- location, location, location. Find a good location, and you may have some power over the network. End up in a bad location in the network and you may get very cold while you helplessly watch others maneuver.

Golden rule of networks is the same as golden rule of Real Estate -- location, location, location.

Below is a network map of the gas flow from Russia, and it's surrounding countries, to Europe. Countries are the green squares in the network, major gas fields are the blue circles. The major players in this battle are Russia, the red node, Ukraine, the yellow node, and Germany, the black node. These important nodes in the network were found using a metric from social network analysis called betweenness. Naturally, Russia is the most central player in the network, Ukraine is close behind, and Germany is locally central within Europe, and a distant third.

Russia is well aware of its dependence on Ukraine for the transport of gas to Europe. Russia would rather avoid that dependency. They have a plan. With Germany, the key node in Europe, Russia plans to build a pipeline that will route around Ukraine, and Belarus [in case they begin to exploit their location], and go straight to Germany. This Baltic Bypass [a.k.a. Nord Stream] will go under the Baltic Sea. This new pipeline is indicated by the red link in the map below -- though it will not be a straight line in the real world. The proposed pipeline will leave Russia between Estonia and Finland and run down the Baltic Sea past Latvia and Lithuania to the German coast.

Applying our centrality metrics again, this time we see a dramatic change. Russia, is still the most central player, but now Germany is second and Kazakhstan is third, leaving the Ukraine a distant fourth -- in a much weaker position. One new link changes the competitive landscape. In the connected world we will see more jostling for better location in the network -- with counter-measures coming quickly. The networked chess board?

Do you know your network landscape and who is adding links or taking them away? A white paper on how power changes in a network when link patterns are altered is available at orgnet.com.


  1. The model is very nice, but fairly useless (pardon being blunt). In these matters pipeline's capacity is everything. Ukraine transports between 250-300 million cubic meters of gas daily. The new "North Stream" pipeline in the Baltics will not be able to even get close to that kind of capacity, so will not strongly affect Ukraine. It will make a difference, but not nearly as much as your model suggests.

  2. Good point on the flow volumes Mikhail! Gazprom does not make that information on their pipe/flow capacity publicly available.

    The model is not useless because the exact flow amounts/capacities are missing. All of the players are jostling for an advantageous position and we can model which positions are better even if we do not know the exact flows in each set of pipes.

    We know the Russians want to centralize around themselves -- increase their betweenness. The Europeans and others do not want that, that is why the "southern route" of pipes, through Georgia, and the "stans" are important. Developing this southern region will reduce Russia's betweenness, even if we can not precisely measure how much at this point.

    Of course Norway further developing the North Sea fields is another possibility to reduce the EU's dependence on RU.

  3. in regards to the org.net pdf:

    I understand and 'get' what you're saying. However the article's slant is similar to that of battling organizations and not cooperative ones.

    It seems like becoming a network weaver reduces your power in any of the networks you participate, so then should network weaving simply be a statement of generosity?

  4. http://yro.slashdot.org/article.pl?sid=09/01/10/0028236

    here's a link to an article on slashdot that's about the trouble with having so much information about you on the internnet. It basically says that it's almost inevitable that you can't keep separate different parts of your online networks. Thought you'd at least find it interesting.

  5. Network weavers do generally end up distributing power via the connections/introductions they make -- but that is a side-effect and not the goal.

    Yes, the slashdot article about the Google paper point to the concept of "structural equivalence" in social network analysis. It is very easy pattern for data mining.

  6. A reader contacted me and pointed out that Gazprom does indeed make information like pipeline sizes and flows available to the general public. She provided this link as a starting point...


  7. Like the thoughts behind the model being applied to the nodes and betweenness per the SNA structure. Didn't get a chance to have a thorough discussion on this week's http://dogearnation.com episode 84, but am watching your twitterstream with interest. Love to see you tag some items to have the panel talk about!

  8. Besides, the significance of Russian gas supplies to Europe incredibly exaggerated by media. Look at the CIA web site - https://www.cia.gov/library/publications/the-world-factbook/index.html - and you get all the figures:

    Russia exports about 240 bcm. gas, from which:
    20 bln. to Belarus
    30 bln. to Turkey
    70 bln. to Ukraine
    10 bln. to other non-EU countries as Moldova, Serbia, Armenia, etc.

    EU in total gets about 110 bln. of Russian gas. The EU itself produces about 200 bln. gas and consumes 500 bln. - i.e. consumption of Russian gas is only 20% and 30% in imports. The remaining 200 bln. EU gets from:
    90 bln. - Norway (not an EU member)
    60 bln. - Algeria
    50 bln. - from Libya, Qatar, etc.

    These figures clearly show that the bubble of "Russian energy monopoly" inflated by media is bluff. I think that this is done for exploitation of pathological hatred of peoples to telephone, gas, electrical, plumbing and other companies regularly sending bills to pay. And because of that the term "Russia is a gas monopoly" instinctively give rise to sharp negative emotions associated with bills.