A Better Energy Weapon to Stop Putin
The Ukraine crisis has spurred calls for ramping up U.S. liquefied natural gas exports to Europe in the hope of translating our new-found energy prowess into geopolitical influence. It's a nice idea. But if the goal is to put pressure on Russian President Vladimir Putin's regime, a more considered proposal might be to lift the ban on the export of U.S. crude oil.
Advocating for American LNG exports is not a serious response to the current crisis, for the simple reason that the U.S. is currently far from being in a position to alleviate Russian energy pressure on Ukraine and Europe with exports of its own. Although American gas is plentiful, it will be years before there are terminals ready to export it. The necessary infrastructure -- to liquefy the gas on one end and to re-gasify it on the other -- is costly and takes time to build.
Over time, these challenges are not insurmountable. And in a future crisis -- if, say, Russia halted gas exports to Europe -- U.S. LNG would flow to Europe, providing an important cushion to our allies. But these volumes would not be under the direction of the American government. Instead, they would be a market response to a situation in which the price of gas would increase significantly, attracting more LNG from the U.S. and elsewhere. (And, if Europe's recent behavior is any indication, the continent would also switch to burning more coal.)
However, in more normal periods, there are constraints on America's ability to directly wield gas exports as a geopolitical tool.
For starters, there is the reality that neither the U.S. government nor European ones are in the business of buying and selling natural gas cargoes. LNG trade is conducted by commercial entities. Let's pretend that U.S. LNG terminals were ready to export today: Would there be a robust LNG trade with Europe? Probably not. At least under the current system, the economics do not appear to support a significant amount of U.S. natural gas exports to Europe, where the price of gas is substantially higher than in the U.S., but much lower than in Asia. When U.S. terminals do begin to export, the gas will most likely move across the Pacific, not the Atlantic.
Moreover, there are limits on how much U.S. LNG will eventually be sold and transported. This, too, is a commercial consideration. Although projections vary, most energy analysts agree that -- with the surge in global LNG expected to occur over the next few years -- the world will only be able to absorb a finite amount of American gas at the prices U.S. entities would find commercially justifiable. Washington could approve all the applications currently in the queue (as some have called for), but market realities will mean that only a fraction of those exports will be realized. The exact volume would primarily depend on the price, not U.S. policy.
All this is not to say that America's gas boom has had no geopolitical benefits -- quite the opposite. By no longer consuming vast quantities of global LNG exports itself, the U.S. has freed up substantial amounts of gas for non-American markets. In 2010 and 2011, that LNG flowed to Europe, significantly increasing the liquidity of the European market and giving European utilities leverage to renegotiate long-term contracts with their Russian suppliers. Future U.S. exports to Asia will likely displace other producers, forcing more non-Russian gas to Europe, again creating more space for European buyers. But these are pressure points that build over time and are hard to manipulate in a crisis.
Russia's real vulnerability lies in the price of oil, not in the realm of gas. Revenue from gas sales abroad make up 8 percent to 9 percent of the Russian budget, while oil revenue accounts for a much heftier 37 percent to 38 percent. It was not that long ago that a prolonged collapse in the price of oil undermined the foundations of the Soviet Union, according to former Deputy Prime Minister Yegor Gaidar. The U.S., by adding 2.5 million barrels of oil to global markets in the last three years, has prevented the price of oil from edging higher in the face of disruptions in Libya, Iran and elsewhere. Should the U.S. continue to increase its oil production, as is widely assumed, it could create pressure to further lower the price.
It would not take a huge price collapse to harm Putin's regime; already, the Russian economy is struggling, and the government has made across-the-board cuts. Plus, Putin's power comes in large measure from extensive patronage networks made possible by high oil prices. To balance its budget, Russia needs oil prices of about $110 (the current price is about $108). A further dip in oil prices is the largest challenge on the horizon to Putin.
If damaging Putin's power base is the objective, then lifting the U.S. ban on crude exports would have more appreciable effects than expediting LNG exports, although in truth they would also be modest. Lifting this ban would not -- as many expect -- lead to U.S. oil substituting for Russian oil in European markets (unless refineries dictated this trade). In a global market, "strategic" direction of exports by the government makes little sense.
Lifting the ban on crude exports could, however, work alongside other factors contributing to the downward price on oil prices that Putin (and other leaders of producing countries) fears. It would probably increase domestic U.S. production somewhat, as there no longer would be a discount on American crudes that have no other market to serve. And it would release further quantities of U.S. crude on to global markets. This would, at least on the margins, contribute to growing global supply, increasing the chance of a global price dip. One may be concerned about the other geopolitical ramifications of such a strategy, but it would at least be consistent with other policies, such as sanctions, to ratchet up pressure on Putin.
Although calls to expedite U.S. natural gas exports are a welcome acknowledgement that the U.S. needs to think more strategically about how to translate its energy riches into global influence, they also point to how far we need to go in understanding the limits and nuances of that leverage.
(Meghan L. O'Sullivan, a professor at Harvard University's Kennedy School of Government and former deputy national security adviser in the George W. Bush administration, is a Bloomberg View columnist.)
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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