May 20, 2014

U.S. natural gas hurting Putin

New-found supplies are undercutting Russia’s economic foundation.

No one hates the U.S. shale revolution more than Russian President Vladimir Putin.

Surging U.S. oil and gas production is a nightmare he can’t escape. Already, U.S. gas production and the promise of U.S. liquefied natural gas exports have Russia’s European customers demanding cheaper prices for gas, and the Russians are reluctantly agreeing.

Nothing is more critical to Putin’s power than Russian energy revenues. Oil and gas exports account for 52 percent of the Russian state budget.

That kind of dependence on one source of revenue can pay the bills when energy demand is high and prices are up, but it can be fiscally disastrous when prices fall.

Putin has long used gas exports, and Russia’s state-run gas company, Gazprom, as a lever of geopolitical influence. To extract concessions from client states, he has on numerous occasions either threatened to cut off the flow of gas, or actually done so. Ukraine knows that all too well.

But that kind of ruthless behavior sends buyers looking for new suppliers. For years, European consumers haven’t had alternatives to Russian gas.

That’s on the verge of changing.

Already, seven U.S. LNG export terminals have received at least partial Department of Energy approval to ship gas to countries with which the U.S. doesn’t have free trade agreements. That includes all of Europe.

While these projects will take years to complete, the writing is on the wall: Russia is going to have a major new competitor in European energy markets.

The question for Europe is: How much is energy security worth? If the full-court press European political leaders have been putting on the Obama administration and Congress to expedite the LNG export approval process is any indication, the answer is: Energy security is worth a lot.

The Russians are pivoting East in response. They’re turning to China as a new Gazprom customer, but the U.S. shale revolution is hanging over contract negotiations there as well.

Some reports suggest that to get a long-term purchase contract from China, Putin may be forced to sell them gas at rock-bottom prices.

It’s no surprise that U.S. energy policy has been slow to catch up with our vast new supply of gas. Bureaucratic inertia is legendary.

President Obama nevertheless should embrace the energy gift that has been left on his doorstep. Roughly two-dozen additional LNG export applications await DOE review.

Putin’s stranglehold on the European gas market is slipping through his hands. Let’s not let it slip through ours.

William F. Shughart II, research director and senior fellow of The Independent Institute, teaches at Utah State University’s Huntsman School of Business. william.shughart@usu.edu

Related content



Editor's Choice Videos