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The Independent Institute
Commentary

Gain Leverage over Putin with Some ‘Shale Diplomacy’


Dealing with Russian President Vladimir Putin isn’t easy.

On the one hand he steps up as “peacemaker” in Syria, forestalling possible U.S. military action against the Assad regime for its alleged chemical-weapons atrocities.

At the same time, he reportedly is increasing sales of advanced anti-aircraft systems to Iran. And he continues to supply Assad with weapons as well.

What’s the United States to do?

First, we need to sober up and recognize the source of Putin’s power: petro-dollars. Half of Russia’s state budget comes from foreign oil and gas revenue. So if we want leverage over Putin and his cronies, we need to break his petro piggybank.

While surging U.S. natural gas production already is applying pressure on the Russians, more can be done. Exporting U.S. liquefied natural gas (LNG) and spreading the shale revolution abroad offer opportunities for undercutting Putin’s power.

The early shale boom stunned global energy markets and caught Russia flatfooted. Its state-owned gas company, Gazprom, was forced to renegotiate supply contracts with European customers and book billion-dollar losses.

Russia’s gas exports ran up against an unlikely competitor: cheap U.S. coal, which flooded the European electricity market as U.S. electric utilities switched from coal to low-cost and abundant natural gas.

However, Gazprom has since recovered, and its profits are climbing again. Exports of Russian gas to Europe are at a three-year high. Since more than half of Gazprom’s revenue comes from such exports, Putin’s coffers are flush again, and he’s flexing his muscles.

Exporting more of our natural gas and technological expertise would be effective ways of hitting Putin where it hurts. With major shale formations scattered across Eastern Europe, the potential is there to pull Gazprom’s largest export market out from under Putin’s nose.

ConocoPhillips, Shell and Chevron, among other major oil-and-gas producers, have reached deals to begin shale development in former Soviet-bloc nations. Chevron alone already has leased some 5.6 million acres of shale-rich land in Ukraine, Poland, Bulgaria, Romania and Lithuania. More will follow.

Meanwhile, U.S. LNG exports are looming large. The Department of Energy has issued export licenses to three companies, with an eye on shipping LNG to key markets in Europe and Asia. With more than a dozen applications from other companies awaiting review, the U.S. could send Putin a strong message by immediately approving a half-dozen more.

Challenging Gazprom in Europe is just half the story. The Russians also are looking east to a huge market in Japan, which needs substitutes for nuclear power to generate electricity, following the accident at Fukushima.

And there is China, the world’s largest energy consumer. The Chinese want to ramp up gas consumption dramatically to reduce their environmentally unsustainable reliance on coal.

Here, too, LNG exports from the United States and the spread of our shale-recovery expertise could curtail Russia’s plans, while providing fertile economic opportunities for major U.S. energy producers and service companies.

China is believed to have the world’s largest shale deposits. Initial efforts to bring Chinese shale oil and gas to market have been slow, but the potential for shale energy production in China is enormous.

Opening up the global energy market to U.S. natural gas exports and expertise will take smart policies at home. Too often we’ve heard President Obama praise the shale revolution in front of one audience, while calling for increased taxes on the oil and gas industry in front of another.

Achieving the full economic and geopolitical potential of the shale revolution requires a policy environment more conducive to oil and gas investment and production. The right path forward will not only grow our economy and improve our own energy security, it would help us check the ambitions of petro-dictator Putin.


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.


From 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?