When Russia cut off the flow of natural gas to Ukraine, in January 2006, it set off alarm bells throughout the European Union, reviving concerns about Russia's reliability as an energy partner. The European Union responded with calls to diversify its energy sources and began mulling anew the virtues of coal and nuclear energy. Russia, for its part, suggested it might sell its natural gas to China instead of Europe.

Despite the apparent differences between Russia and Europe, both sides need the other more than they care to admit. Europe has few economical alternatives for its energy needs. Coal generates too much carbon dioxide. New nuclear power is controversial and wouldn't be on line for at least a decade, even if it became politically palatable. Alternative sources of gas, such as liquefied natural gas (LNG) from the Middle East and North Africa, would not only be prohibitively expensive but also force the EU to compete for supply against more lucrative gas markets, such as the United States. In fact, we estimate it would cost the European Union $40 billion to $60 billion (net present value) more to meet its energy needs from sources other than Russia.

As for Russia, we...