There now seems to be general consensus amongst the United States and many European nations regarding the actions of the Putin regime in Eastern Ukraine and what should be done about them. Tragically, It took the downing of a civilian plane and the loss of 298 innocent lives, but there is finally agreement that something must be done.
It appears, though, that all are also agreed that action should fall short of a military response, either direct or indirect. As the father of a U.S. Army soldier, I hope that that can be achieved, but for economic sanctions to be effective, they have to hit hard.
We have successive rounds of increasingly punitive sanctions, originally from the U.S. unilaterally, and now, asannounced July 30, from Europe as well. Dig a little deeper, though, and it becomes clear that the package of measures agreed on keeps certain channels of trade open for certain countries. The French will still be able to sell Russia the two warships they have been building for them. Financial sanctions have been designed so as not to hit the U.K. too hard, and the lack of an energy embargo leaves Germany and others dependent upon Russian oil and gas still supplied.
The level of German dependency on Russian natural gas, in particular, has often been exaggerated. Germany gets around 39 percent of its natural gas from Russia, but gas only accounts for about 22 percent of the country’s total energy consumption, according to the International Energy Agency. But when you consider the fact that Russian oil supplies over 50 percent of Germany’s energy needs, you can see why a full energy embargo would be painful.
Gas and oil exports are critical to the Russian economy, though, and a credible threat to that industry would put real pressure on the Putin regime.
Much has been written about the prospect of the U.S. lifting the ban on oil exports, but as detailed in this Businessweek article, that looks like a political non-starter. That doesn’t mean, however, that America can’t take actions that will make the prospect of an energy embargo appear closer than it is now.
While the oil export ban looks like it will remain in force, the export of U.S. natural gas faces less severe political headwinds and has been mainly held back by more mundane concerns. Until relatively recently, there simply wasn’t enough of it and, as a result, when the shale boom resulted in a huge increase in production, there was no infrastructure for liquefying and exporting it. That is gradually beginning to change and this is where the U.S. Environmental Protection Agency (EPA) comes in.
According to CNBC, the U.S. is set to begin exporting liquefied natural gas (LNG) from one facility later this year (assuming that Congress can actually pass some legislation) while five others have conditional approval. One of the things holding back the process is the complex and extensive regulations that surround the building and operation of LNG terminals and liquefaction plants.
If the EPA were to merely announce that they would be fast-tracking investigation and approval of these and any future plants, it would send a message to Putin that some serious sanctions could be coming soon.
U.S. natural gas prices are typically about one-third of the global market price, so, obviously, releasing huge amounts of U.S. gas onto the world market would affect prices. That in and of itself would be harmful to Russian interests, but it would also make it easier for Germany to stand firm in a gas embargo.
As this Deutsche Welle article makes clear, the gas that Germany imports from Russia could, in large part, be sourced from elsewhere, but economic considerations currently prevent that. The Russian gas that Germany uses is significantly cheaper than gas on the global market. Reduce the global cost by raising just the possibility of exports from the U.S., and threats by Germany and other EU nations to hit Russia with tougher sanctions become much more believable.
I should emphasize that I am not suggesting that regulations governing natural gas plants should be scrapped, nor even reduced significantly. The economic and strategic benefits of the current U.S. oil and gas boom have to be carefully weighed against the environmental risks, and government regulation is the best way to do that.
However, an EPA announcement that it will attempt to speed up the export of LNG, or even a request for funds to do so, would send a message to Putin that the leverage he has from Russia’s gas reserves may not be available for much longer.
Russia’s recent deal to supply China with gas suggests that he already knows that day is coming, but if the EPA can convince him that it is coming sooner than he expects, it could give both the current sanctions, and the threat of future penalties, some real teeth.
This piece is cross-posted from OilPrice.com with permission.