Politics of Power

As the political situation continues to develop in the Crimean peninsula, there have been frenzied calls among American politicians to break Russia’s energy dominance in the region.  The principle idea is to leverage the burgeoning North American shale revolution by exporting natural gas to continental Europe and weaken a key facet of Russian power. However, though there is abundant natural gas in North America, the complex export infrastructure in America that is needed to ship liquefied natural gas is still years away from being completed at any meaningful scale. In addition, many of the terminals that are closest to being completed have already inked long-term gas contracts with customers. Even if European politicians wish to flood their markets with cheap American gas — as the ambassadors to the United States from Hungary, Poland, the Czech Republic and Slovakia asked for in a letter to congressional leaders — they would still have to compete with Asian customers who are willing to pay nearly 50 percent more than Europe. Fundamentally, regardless of the political posturing, gas producers would never choose to leave money on the table in order to further American geopolitical aims.

As I talked about in an earlier column, with an eye towards the long-term, the shale revolution has the potential to alter political and economic policies around the world. But with regards to the current circumstances in the Ukraine, America simply cannot help besieged allies by making it easier to export natural gas. This does not mean America has no way to exert influence through global energy markets. There are two separate and specific tools that the U.S. can immediately lean on to disrupt the current status quo in Europe.

The first of these tools is the Strategic Petroleum Reserve (SPR) located in both Louisiana and Texas, which currently holds 696 million barrels of government-owned crude oil. With oil and gas making up more than half of Russia’s budget revenues and a budget that is only balanced when oil remains at $110 a barrel, Moscow is vulnerable to price shocks. By releasing a mere 500,000 barrels a day from the SPR, prices could fall by about $10 and cost the Russian government roughly $40 billion in annual sales. The U.S. government could maintain this for years if it wanted to, and could drop about 4 percent off Russia’s GDP.

The other option is something we are already doing and have been doing for years but is not high on the Obama administration’s agenda nor is it palatable to his counterparts in Europe: cheap, plentiful American coal. As natural gas prices fell in the U.S. and electrical generation began to switch to cleaner, more efficient gas, King Coal lost its leading role in the American electrical generation portfolio. The U.S set a record in 2012 for coal exports – with the majority already going to Europe’s remaining coal-fired power plants. The infrastructure for exporting coal is already in place and, unlike natural gas, coal is not governed by antiquated and complicated U.S. export regulation. The obvious downside to increased coal consumption is that when burned for power it releases roughly twice the amount of greenhouse gas as natural gas does.

As Europe continues to struggle with shifting power structures and long-term questions about their energy security, European leaders cannot rely on these stop-gap measures. In order to reestablish economic competitiveness and continue to set the benchmark for climate change goals, Europe needs to look within its own borders to find the solutions to these problems. However, right now, in this current situation, American and European leaders need to be examining all of their options to see what will have an effect at the negotiating table.