In a speech on Monday, Russian President Vladimir Putin announced that elements of Russia’s army would soon move into two disputed Eastern regions of Ukraine on what he calls a “peace-keeping mission.” Those two regions – Donetsk and Luhansk – are populated largely by people of Russian descent, and are the sites of frequent armed hostilities between dissidents and Ukrainian government forces. Much like he did in 2015 in Crimea, it seems evident that Putin’s ultimate goal is the annexation of these two regions.
In response to Putin’s incursion, German Chancellor Olaf Scholz announced that his government would put efforts to reach final approval and certification of Russia’s Nord Stream 2 pipeline on hold and assess other means of securing adequate natural gas supplies for his country. “The appropriate departments of the economy ministry will make a new assessment of the security of our supply in light of what has changed in last few days,” he said.
Should the situation between Russia and Ukraine continue to deteriorate, the question for Scholz and the German people would become one of identifying alternative sources for the natural gas that is so crucial to the country’s electricity grid and economy. Since last fall, Scholz’s government has found itself in a scramble to obtain adequate gas supplies as the wind industry on which his predecessor in office, Angela Merkel, bet the country’s energy future, has failed to deliver on its promises. Many other European countries have found themselves in the same situation thanks to similarly ill-considered energy policy decisions.
To this point, Europe’s natural gas salvation has come in the form of increased imports of liquefied natural gas (LNG), most of which has been provided by the U.S., and to a lesser extent, Qatar. This is all taking place simultaneously with an expansion of new LNG export capacity in the U.S., which, if allowed to continue, could eventually provide sufficient export volumes to help Germany and other European nations make do with less Russian gas supplies.
At the same time, however, the Biden administration’s regulatory officials at FERC, EPA and the Interior Department continue to crank out heavy new measures designed to impede America’s domestic oil and gas industry. One focus of that regulatory overreach has been denial of permits for pipelines to move the natural gas to markets, including to the LNG export facilities. Just last week, FERC issued a harsh new policy guidance related to natural gas pipeline permitting approvals, resulting in pushback from House Minority Whip Steve Scalise. “For months now, dozens, if not hundreds, of natural gas pipeline applications have languished in front of this same Commission, contributing to record increases in energy costs for hard-working American families,” Scalise said in a statement.
On February 19, the Department of Interior lashed out in response to an adverse court decision by announcing it would halt progress on all permitting efforts for oil and gas activities on federal lands and waters, including the Gulf of Mexico. A federal judge in Louisiana blocked the administration’s effort to raise the so-called “social cost of carbon” calculation related to oil and gas production by more than 700%, a rubric used by the Obama administration to block development on federal lands, and which Biden’s people hope to revive.
As a result of these measures and so many more coming every day from this administration, we see the U.S. government working at cross purposes to Europe’s expanding appetite for America’s LNG. This signals that, for the remainder of the Biden presidency, the U.S. may not be a reliable supply partner for Scholz. Qatar has been able to increase its own exports into Europe over the winter, but its industry also has contractual commitments to other customers that must be honored. All of which has the effect of providing President Putin with a high degree of geopolitical leverage in his apparent effort to take another bite out of Ukraine.
We see the same dynamic at play related to Russia’s oil on an even grander scale. The global supply/demand equation related to oil is very tight even with Russia’s 10 million or so barrels per day coming onto the market. Should part or all of that supply go away due to sanctions imposed by the U.S. and Europe, $100 per barrel would quickly become a floor price for the commodity. With the global economy already in a weakening state and dealing with rising inflation, the leaders of these western democracies know their countries can ill-afford to impose such sanctions.
Thus, as we so often see, energy plays a major role in geopolitics. As the situation stands today, Putin appears to have Europe and the U.S. administration literally over a barrel. Chancellor Scholz may have suspended progress on final approval for Nord Stream 2 for now, but given his country’s need for natural gas and apparent lack of reliable alternatives, it will be interesting to see how long his suspension can last.
