RUSSIAN SANCTIONS AND THE
NEGATIVE EFFECT ON GLOBAL ENERGY SECURITY.
Author: Igor Alexeev via OilPrice.com,
Submitted by Tyler Durden on
04/08/2014
After a series of headline-grabbing statements about the
possibility of “switching” European consumers over to American gas, the US
media hastened to announce the launch of Obama’s oil and gas offensive against
Russia. In reality the EU is not currently prepared, neither technically nor in
terms of price, to buy its energy resources from the US. It would take at
least ten years to adapt even the technically advanced German energy system to
work with American gas supply. In a crisis, when it is particularly urgent to
see a quick return on an investment, such projects are unrealistic.
Whether German industry is ready to pay more for gas from
overseas just for the dubious pleasure of “punishing” someone is a big
question. Unlike EU officials, the German government is not publicly
calling into question either its long-term contracts with Russia or the future
of the South Stream pipeline. On March 13, 2014, the chairman of the board of
Gazprom, Alexei Miller, attended a meeting with the Vice-Chancellor and
Minister of Economics and Energy of Germany Sigmar Gabriel. “Germany is
Russia’s number one partner in Europe’s gas and energy market,” Miller stated.
“Russian gas accounts for 40% of all German imports. And we’re also noting an
upwards tick in the quantity of gas supplies coming from Russia. Last
year, shipments totaled more than 40 billion cubic meters and we’ve seen a 20%
annual increase.” Looking at these statistics, it’s clear that all the talk about
Atlantic solidarity is having zero effect on the German government’s rational
decision making. “We don’t need conflict escalation”, said
Sigmar Gabriel during an expert roundtable on energy policy later in March.
“Russia met its obligations under the gas contracts even in the darkest years
of the Cold War”.
Sigmar Gabriel knows what he’s talking about. For Europe to
be able to fully utilize gas supplies from the US, it will be necessary to
build expensive facilities to decompress and store the gas. Moreover, in order
to incorporate the “American” gas into the existing local energy systems, the
European countries would need to construct new pumping stations. The associated
infrastructure will further add to the price for the end consumer. Neither the
bosses of the German industry nor the responsible political leaders will
support such policy.
So WHO’S BEHIND THE DEMANDS THAT RUSSIA BE PUNISHED?
Barack Obama continues to look outside of Europe for
ways to pressure Moscow. It is no coincidence that the US president’s recent
statements on energy policy coincided with his visit to Saudi Arabia. President
Obama came to Riyadh to bring down prices in exchange for the development of
Saudi Arabian facilities to extract and liquefy gas for delivery to Europe.
It’s unlikely that even Charles
Maurice de Talleyrand himself could have persuaded the Saudis to dump as
many resources as possible onto the market in exchange for the nebulous promise
of American help to obtain new gas facilities at some unspecified date in the future.
Qatar’s position needs to be kept in mind too. There are
serious personal disagreements between the Saudis and the hypersensitive former
emir of Qatar as no one in the Middle East needs a new competitor in the gas
industry. Obama’s attempt to repeat Ronald Reagan’s oil trick in the Middle
East and “shake down” global prices will face many obstacles. A hike in oil
prices below $80 would expose yet another issue that was a real controversy
during Obama’s reelection campaign, namely - what to do about Iraq. Even a 10%
drop in oil prices would finish off the Iraqi economy, still reeling from the
US invasion. And Israel is closely monitoring the White House’s attempts to
initiate a rapprochement with Iran. If Uncle Sam tries to levy energy sanctions
against Russia using his political positions in the Middle East, he will
quickly find he has loaded a gun only to shoot himself in the foot.
The US Secretary of Energy, Ernest Moniz, an Obama
appointee and shale enthusiast, has jumped right into the discussion of
“punishing” Russia. He promised to consider new efforts to ship LNG from the
USA to Europe. In this particular case his verbal intervention is unlikely to
reflect the position of the CEOs of the oil majors. They know very well that
the industry’s real break-even points are nowhere near where they were 30 years
ago due to inflation and higher operation costs. Today one facility—Cheniere's
$10 billion Sabine Pass terminal in Cameron Parish—has
the required approvals from the Energy Department and U.S. Federal Energy
Regulatory Commission.
In early March, the American economist Philip Verleger,
who worked in the White House and the US Treasury in the 1970s, spoke as an
expert on the issue of using energy as way to “punish” Russia. In the March 3,
2014 newsletter that he publishes for his clients, Verleger wrote that the US
has a tool it can use to influence Russia - its Strategic Petroleum Reserve
(SPR). US Reserve currently contains almost 700 million barrels of oil, five
million of which were unloaded onto the market during the Washington visit of
the interim Ukrainian Prime Minister Arseniy Yatsenyuk. “It almost defies logic
to think there isn’t a link,” noted John Kingston, the director of Platts’ news
division. Tapping the SPR to manipulate the global market would be a highly
extraordinary decision. The only way to exert any real pressure on global oil
prices would be to open up at least 50% of the entire SPR and grant export
licenses to anyone who wanted one. The American DoE is obviously not ready for
such draconian measures.
Looking at the 2014 report written by the DoE analysts who
are known for their almost religious faith in alternative energy, the minimum
price for oil in 2015 will be $89.75/barr. The Russian national budget in 2014,
which was saddled with expenses related to the Olympics, was drawn up based on
an average price of $93 per barrel. Ergo, even $80-90 would hardly spell
disaster for Moscow, much less $100 a barrel. In addition, the “nonmarket”
pressure by the US could be balanced by the exporter nations. For example, the
idea of “energy currency” has long been a hot topic within OPEC and the Gas Exporting Countries Forum (GECF).
For the first time ever in the history of US-Russian
relations we are seeing a public debate about a threat of economic sanctions
that may have a long-range negative effect on global energy security. The
Obama administration acts as if it is guided by a chapter out of an old Soviet
textbook on political economy. At the moment, apparently, the sacred dogma of
the free market, from Samuelson to Friedman, can be conveniently overlooked for
the sake of punishing a sovereign nation. When the head of the most influential
state in the world talks about manipulating market prices to punish
recalcitrant players, what kind of “global free market” and fair play are we
really talking about?
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