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Commentary

Putting Putin in His Place


     
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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. In fact, many East European countries rely on imports from Russia to meet 80 percent or more of their natural gas needs.

As a result of America’s shale-gas boom, that’s on the verge of changing.

Already, seven U.S. LNG export terminals have received Department of Energy approval to ship gas to countries with which the United States 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.

While the Russians will be able to undercut U.S. gas prices because their gas can be moved directly to market by pipeline, European buyers are ready to diversify their supply sources.

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.

The Chinese need natural gas to reduce their dependence on coal. China is now burning nearly as much coal as the rest of the world combined. But China is well aware of Putin’s eroding European market share and it’s also eager to buy U.S. LNG; so China’s driving a tough bargain. 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.

America’s new position as the world’s largest natural gas producer and burgeoning gas exporter is remarkable. Just five years ago many experts inside the U.S. government and at U.S. utilities believed we were on the verge of becoming a major gas importer. Vladimir Putin, in fact, eyed the U.S. market as the next destination for Russian gas.

It should be 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. If the approval of just seven export terminals already has begun to shift the balance of power away from Putin, imagine what the speedy approval of the remaining applications might yield.

It’s time to find out. 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 is a Research Director and Senior Fellow at The Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.

Taxing ChoiceFrom William F. Shughart II
TAXING CHOICE: The Predatory Politics of Fiscal Discrimination
So-called “sin taxes”—the taxing of certain products, like alcohol and tobacco, that are deemed to be “politically incorrect”—have long been a favorite way for politicians to fund programs benefiting special interest groups. But this concept has been applied to such “sinful” products as soft drinks, margarine, telephone calls, airline tickets, and even fishing gear. What is the true record of this selective, often punitive, approach to taxation? Learn More »»






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