The Ukrainian Ripple Effect

Mar 14, 2014

Seismic events in the Ukraine – reminiscent of the “Cold War’ of yesteryear – are providing a pretext for those seeking a new domestic energy blitzkrieg.    

     Energy plays a powerful role in this latest geopolitical crisis du jour. Russia, for example, supplies about 30% of Europe’s natural gas – much of it reaching Europe through Ukrainian pipelines. The 2009 Ukrainian pipeline closure reminded the Europeans of their dependence on Russian natural gas and explains their reluctance to overreact to Russia’s recent moves. 

      In America, the crisis is used by some to promote a new energy "blitzkrieg:" The idea is to use our growing shale oil and gas production as leverage against Mr. Putin. We do this by ramping up our domestic production, if possible, and flooding the globe with American oil and natural gas. Presto! The Europeans are weaned of their dependency on Russian gas; global oil and gas prices are driven down and Russia’s oil revenues are clobbered. If only it were that simple. 

     This strategy, unfortunately, is predicated on a number of false premises: a) That we have an infinite supply of recoverable shale oil and gas, b) that we have the capacity to quickly process and ship natural gas to bolster our European allies, and c) that the geopolitical environment is static and that other nations will stand idly by as our strategy unfolds. The assumptions are flawed; the potential backlash great. Consider this:

   1) Energy resources: The strategy assumes the United States can become a netexporter of oil/gas energy. To do so, we would have to produce more oil and natural gas than we consume. True, perhaps, for natural gas but not for oil. (Parenthetically, our great “glut” of natural gas has not lowered natural gas or propane prices this winter)

     With respect to oil, we import about 40% of the oil we use. That means if we export, say, two million barrels of oil daily, we’ll need to import an equal amount to meet domestic demand. So much for a two-step shuffle that will neither increase global oil supply or lower global prices; though it will improve the bottom line of oil companies and shippers.    

   2) Exporting natural gas: Even if we decided to export natural gas to Europe, we lack the infrastructure to do it. Shipping natural gas is a costly and complex process. The gas must first be liquefied into LNG (liquefied natural gas) by cooling it to minus – 260 degrees Fahrenheit. It must then be stored and shipped in special cryogenic LNG carriers and re-gasified and distributed as a pipeline natural gas once it reaches Europe.

      Absent a current capacity, the timeframes are long for issuing permits, building LNG terminals and gaining approval from port cities fearful of a catastrophic LNG explosion. Bottom line: We can’t mitigate Europe’s natural gas shortages now or for years to come. 

   3) Global oil realities: The incessant hype about America’s new energy “dominance” is delusional. Three snippets to ponder: 1) OPEC producers hold over 70% of the world’sproven oil reserves; 2) The FSU (Former Soviet Union) countries exported over 8 MB/D (million barrels per day) of crude oil in 2013 whereas America imported over 7 MB/D of crude oil, and 3) The 2-3 MB/D of shale oil we produce is miniscule in comparison to the 90 MB/D of oil produced globally. Given these facts, do we really believe we have the “leverage” to change Mr. Putin’s behavior by exporting oil we don’t have? C’mon…

   4) Backlash factors: In a dynamic global environment, actions create reactions. For example, an ill-conceived global oil play that led OPEC to move away from the petro-dollar system would be an economic catastrophe for America and others. And, like it or not, Russia’s influence on their client states, Iran and Syria, is worth considering as we grope for collaborative – not confrontational – solutions to these global nightmares.  

Closing thoughts: There are no easy answers to the Ukrainian crisis, and we would be wise not to use it as a pretext for rushing into an ill-advised energy plan. Energy is the 800 pound gorilla on the geopolitical scene, and the situation will only worsen until we wean away from our addiction to oil and migrate to alternative energy systems. Why spin our wheels rearranging deck chairs on the Titanic?

     The blitzkrieg strategy presupposes an unlimited supply of recoverable shale oil and gas – something the immutable laws of geology and a pending shale oil “bubble” will prevent from happening (Please see: Shale Oil: Not What It’s ‘Fracked’ Up To Be”). Exporting natural gas may be a bonanza for oil companies but not so good for consumers and American manufacturers now enjoying the competitive advantage of lower energy costs. Changing climate patterns and brutally cold winters will also bite deeply into future gas reserves. Food for thought…

     Here’s an alternative: 1) Restock our Strategic Petroleum Reserve as a hedge against future global conflicts, 2) Build new alternative energy systems, 3) Use excess natural gas as a “bridging” fuel for the long transition to new energy systems, and 4) strengthen global ties and recalibrate geopolitical strategies to better fit a dynamically changing world. For more information, please visit our website:www.WeatheringtheStorm.net 

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