Bold Energy Policy Best Response To Russia In Ukraine

Investor's Business Daily

Russia has seized the Ukrainian province of Crimea, leaving the U.S. and Europe with few diplomatic options.

Vladimir Putin knows the West is not going to go to war over Ukraine, and he's clearly not worried about President Obama's warning of "costs" or talk of canceling a G-8 summit in Sochi.

The West's best Russia policy is a bold energy policy.

Russia's economy is barely growing and is increasingly dependent on energy production. Oil and gas account for more than half of Russia's federal tax revenues and about 75% of total exports. Three-fourths of natural gas shipments go to Europe. Europe is dependent on Russia, but the tables are starting to turn.

For decades, natural gas price contracts have been tied to oil. That leaves Europe paying double or triple what America has been paying in recent years.

Luckily, this gas-oil price link is starting to break down, thanks to limited liquefied natural gas (LNG) imports and other advances.

Here are seven energy policy steps that the West should adopt, all of which have the side benefit of undermining Putin.

1. Europe should open up to fracking. Europe has been opposed to fracking even as the U.S. reaps the benefits of an energy boom. Environmental concerns have been a major factor, though natural gas reduces CO2 emissions vs. coal. Also, mineral rights in Europe tend to belong to the government, not the property owner as in the U.S.

So there's no vested interest in local shale development.

It's not clear how much shale oil and gas Europe has. But the Continent won't know until it tries. One of the best opportunities for shale may be in Ukraine.

Even pro-Russian President Viktor Yanukovych, before his ouster last month, signed on to shale gas production deals with Chevron (CVX) and Royal Dutch Shell (RDSA).

More European production could have a big impact on Russian gas prices. And it would protect against Russian threats to cut off gas supplies in winter — which it did to Ukraine twice in the past decade.

Russia, which has tried to dismiss fracking as a bubble, belatedly realizes this. In recent years it's worked behind the scenes to encourage anti-fracking efforts in Europe.

2. America should expand fracking. The U.S. is enjoying an energy renaissance, thanks to fracking, horizontal drilling and other technological advances.

But almost all of the gains in oil and natural gas production have been on private lands. Obama should move to open up public lands to energy exploration.

3. Promote LNG exports. LNG facilities are expensive to build. But the biggest obstacle is regulatory. The U.S. requires approval from the Federal Energy Regulatory Commission, as well as an export license from the Energy Department. DOE licenses can take months, with the last four permits taking more than two years. It can take five years before an Energy Department OK turns into real exports. The Obama administration should work to streamline the regulatory process.

More LNG exports will bring down the price of natural gas worldwide. Many European LNG import facilities have been idle or running at low capacity. Exporters are sending shipments to Asia, where prices are even higher than Europe.

LNG exports will further reduce America's trade deficit. Some argue that the U.S. should keep natural gas at home to give America an energy advantage. Chemical firms in particular want cheap natgas for fuel and as a raw material. But if domestic natgas prices rise, it should encourage more production. Shale output can be ramped up or down relatively quickly.

4. Allow U.S. petroleum exports. America has banned petroleum exports since the Arab oil boycotts of the 1970s. But with the U.S. poised to be the world's No. 1 producer, whatever logic the prohibition once had is long gone.

The ban helps keep a wide gap between U.S. light sweet crude vs. London-based Brent — $6.28 a barrel as of Monday.

An export ban hurts U.S. producers and discourages output. It mostly benefits refineries, which are ramping up exports of refined fuels — at the global price.

Lifting the export ban in particular would have speedy impact on global crude prices, dealing a quick hit to Putin's pocketbook.

5. OK Keystone XL pipeline. There are many reasons to back the Keystone XL pipeline from Canada to the Gulf of Mexico. It would create thousands of jobs, lower oil prices and reduce the risk of crude-by-rail accidents. The oil is going to be produced anyway, which even the Obama administration admits.

6. Enrich Ukraine. Germany, in the wake of Japan's Fukushima nuclear disaster in 2011, declared that all German nuclear plants would be shut down by 2022, rather than 2036.

Nuclear power plants are hideously expensive to build and decommission, making them dubious investments. But while operational, they provide low-cost power — and no CO2 emissions.

Cutting off nuclear power will mean sharply higher energy costs, dealing a serious blow to German industry.

Renewables won't cut it either. In fact, Europe, despite its green pretensions, is starting to build coal-fired plants in response to high energy prices.

If Germany were serious about countering Putin, it would embrace a "Ukrainian enrichment" strategy by extending the cutoff date for nuclear plants.

7. Unify Cyprus. Cyprus has sizable natural gas fields in its territorial waters. But the island is split between the Greek-Cypriot government — which is part of the EU — and a Turkish-controlled rival. A new round of talks between the two sides is starting.

Co-operation on the gas fields would be key and would open up the possibility of a pipeline to Turkey. Eventually, pipelines might be extended to include future offshore gas from Israel.

All of these steps are worth doing for economic reasons. And while they wouldn't bring relief to Ukraine tomorrow, next week or even next year, they would have a serious impact on Putin's state-owned energy economy and his bullying at home and abroad. That's far more effective than Western leaders making impotent statements for a few days before moving on to the next crisis at home or abroad.

Approving the Keystone pipeline or encouraging fracking in Europe also aren't provocations. Putin can't declare such moves as threats — but he knows they would be.

Finally, smart energy policies also would undermine other energy autocrats around the world, including Venezuela.

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