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February 01, 2022

High Oil and Gas Prices Fuel Russian and Iranian Aggressiveness

Drill, baby drill is a peaceful (and environmentally sound) response.

The threat to peace

At over $80/barrel for oil, Russia and Iran are awash in profits; today’s price is $88. They can afford guns and butter. We see the results on the borders of Ukraine and in increased attacks by Houthi rebels on the UAE. At $40/barrel, both countries have all they can do to stifle internal rebellion against autocracy, kleptocracy, and general mismanagement.

Responding to Russian aggression in concert with NATO is difficult because Europe obtains 40% of its natural gas from Russia. This heating season began there with low supplies because more than a usual amount of gas had been burned to supplement unusually low yield from wind and solar used to generate electricity. Russia has refused to sell enough additional gas to Europe to refill the reserves, which keeps Europe particularly vulnerable to any threat from Russia to reduce the flow and does not leave Europe in a position to reduce Russian import revenue. Our European allies have asked the US to help them find more gas; but we are limited both by self-imposed restrictions on our supply and the prior refusal by some counties – especially Germany and France – to allow LNG import facilities to be built.

Germany made itself particularly vulnerable when Andrea Merkle over-reacted to Fukushima with a hasty shutdown of Germany’s nuclear capacity for generating electricity.  Realizing that this created a need for natural gas, Germany contracted with Russia for supplies through a new gas line between the two countries, Nord Stream 2. Significantly Nord Stream 2 bypasses Ukraine through which much Russian gas reaches Europe today. The US has opposed Nord Stream 2 for security reasons, but Biden backed off on opposition early in his term in a bid to improve German-American relations. The pipeline is essentially finished but Germany has not yet given final approval for its operation. Meanwhile, Germany has had to increase coal use and is suffering from soaring electric rates because of high natural gas prices.

The threat to the environment

The incoming Biden administration has moved quickly to make oil and natural gas more expensive by canceling pipelines and refusing to issue drilling permits. As higher oil prices showed up at the pump, Biden was in the ridiculous situation of begging OPEC and Russia to increase production. His intent was to save the environment by reducing the use of fossil fuels. The affect was simply to increase production and the profitability of production is places like Russia, where there are no effective environmental restrictions on dirty drilling and leaky pipes while reducing production here where we can enforce good practices.

With natural gas prices up and supply down, Europe has been burning more coal. Coal emits at least 50% more CO2 per unit of energy than oil and 100% more than natural gas. Far from saving the environment, actions taken to reduce US production have INCREASED greenhouse gas emissions and strengthened our adversaries.

So now what do we do?

Franky the US hasn’t had a good record of carrying through on its threats nor of convincing Europe to take strong joint action.  It’s unlikely that threats of any kind, especially threats of yet more economic sanctions, will deter Putin as long as he has the upper hand. We should take the steps below now – regardless of what Putin does – to reduce the advantage that high energy prices and tight supplies give Russia (and Iran).

  1. Drive oil prices and Russian oil revenue down immediately by increasing sales from the US strategic oil reserve. We needed those reserves when OPEC could cut us off; they can’t do that anymore. There is enough petroleum in the reserve to add 10% per day to the amount we are producing for almost two years. It won’t take that long to bring oil prices down.
  2. Don’t get in the way of increased US production of oil and gas. Fortunately, we have a private sector which has already responded to high oil and gas prices by increasing production. We have demonstrated that we are the world’s swing producer; we can make oil and gas prices crash. We should do so.
  3. Don’t let the major US oil and gas producers push regulation which shuts down their smaller competitors. Left to themselves, the majors are just fine with high oil prices because their value is the value of the wells and reserves they already own. It takes aggressive small producers to keep them honest.
  4. Do, however, regulate fugitive gas emissions from oil well drilling and gas pipelines. Use infrastructure money to rebuild leaky municipal gas systems; someday those pipes will carry clean hydrogen.
  5. Continue building pipelines to ocean ports so American energy can reach the world market and drive world fuel prices down again. Remember that most of this fuel will replace other fossil fuel from places which are not nearly as scrupulous environmentally as we can be.
  6. Tell our European allies that we have their back for long-term gas supplies and that we support their new emphasis on nuclear power to reduce the need for fossil fuels – and drive energy prices down. But tell Germany that they can’t have it both ways. No Nord Stream 2 if we are their supplier of last resort.

All the above will be much more effective than sanctions-as-usual. And will protect the environment from coal and dirty drilling as well.

 

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