Russia needs the world price of oil and natural gas to be high. This is a simple truth which provides the basis for dealing with Moscow's aggressive tendencies. The main source of income for the Kremlin is the sale of Russia's copious oil and gas production. Further, since much of Europe depends on Russia for its energy needs, the Kremlin has particular influence over the other countries in Europe. What this means is that when petroleum and natural gas prices are high (like now), Russia prospers and has adequate funds to support foreign adventures, but were oil and gas prices to fall, Russia would find itself struggling to meet the needs of its economy and hard put to pay for the military forces like the ones now in Crimea.
Much has been said about using oil and gas as weapons against Moscow. Many of the commentators scoff at the idea and point out that moves in the energy field will not force the Russians out of Crimea. That is a rather short-sighted outlook. Bringing down energy prices is a long term strategy to defang the Russians. It will not save Crimea from being overrun, but it may save Kiev and the rest of Ukraine. It will also protect countries like Poland, Lithuania, Latvia, Estonia, Romania, Slovakia and the others who fear Russia will visit their nations next.
Let's look at how this strategy would work. First of all consider the steps that the USA could take on its own:
1. President Obama should immediately approve the Keystone XL Pipeline. This would enlarge the world's daily oil production by 1% at the end of three years. That may not sound like much, but it is actually huge. Most oil usage remains the same even if the price rises or falls. That means that even small increases in production can lead eventually to large drops in price.
2. Obama should also immediately open federal lands to drilling and simplify and expedite the process for obtaining drilling permits. Environmental constraints should not be abandoned, but the endless red tape, extra expense and moratoriums used to prevent most drilling on the millions of acres of federal property have reduced America's oil output by an estimated one million barrels per day, an amount larger than the flow in the Keystone pipeline once it is completed.
3. Obama should take steps to expedite approval of permits for the export of natural gas. America has enormous reserves of natural gas, the largest in the world. Right now, production in America is so large that drilling for this resource has almost ended. That glut has kept natural gas prices low for many years now. America's enormous reserves of low cost natural gas could easily be shipped to Europe so as to supply a significant percentage of the energy needs of that continent. Shipping that gas is expensive; the estimates are a cost of $6 per unit of gas that only cost about $4.50 on the market at the moment. Even with those high shipping costs, however, American gas could be sold profitably in Europe for $11. Compare that with the current price in Europe of gas from Russia of roughly $18. Obviously, everyone in Europe who could buy $11 gas from America would choose it over $18 gas from Russia. The price for the two would quickly move towards each other. Let's assume that the end result would be a price of something like $13. Such a move would take nearly all of the profit out of the gas Moscow is selling. The blow to Russia's power would be immense.
4. America should encourage Saudi Arabia to increase its oil output. Russia has supported the countries who are the greatest threats to the Saudis, namely Iran and Syria (the Assad regime). The Saudis should be convinced that a concerted effort to lower world oil prices will greatly weaken the Russians. Further, a lower oil price on world markets will also be a major headache for the Iranians.
5. Steps should be taken to promote the switch to the use of natural gas to fuel trucks, buses and other large vehicles across America. This move is already underway, but support from the federal government could greatly expedite the process. This is the single largest change America could make which would significantly reduce the need for oil in our economy. The other conservation moves like fluorescent light bulbs or extra insulation in homes do not have that effect and need not be the focus of our efforts. Less than one percent of America's electric power comes from oil, so more efficient light bulbs have no appreciable impact on the use of oil. A similarly small number of homes are heated with oil these days, so insulation is another area that has little impact. So too, the use of solar or wind energy have essentially no impact on oil use and oil prices.
If these steps were taken, consider the results:
a. The world price of oil would almost certainly fall. No one can predict exactly where that price would end up, but a likely area is at roughly $80 per barrel. That is about a 25-30% reduction from the present price. The drop would not come in one week or one month, but rather over a few years.
b. The price of natural gas in Europe would drop by more than 25-30%. The volume of Russian gas sold in Europe would also fall dramatically.
c. The income Russia earns from its energy exports would be cut at least in half and maybe by even more. Remember that the price drops for oil and natural gas would not cut the costs incurred by Russia to produce those products. The entire price drop would come out of the profits earned by the Russians. Instead of wallowing in huge energy profits, Russia would suddenly find itself squeezed for cash.
d. America's economy would get a major boost. First of all, we would have the profits earned from the big increase in energy production. Remember, those profits do not go just to big oil companies. hundreds of thousands or even millions of people would get royalties from the production of energy on their land. The federal government would get billions upon billions of dollars in both tax and royalty revenues from the new production. Millions of jobs would be created in the energy industry and all the other areas of the economy that supply goods and services to the energy industry. Lower oil and gas prices would put cash into the pockets of the average American who would spend less on filling his or her car. Economic growth would be more than 1% higher each year, a fact which would lower unemployment in dramatic fashion.
e. Europe's economy outside Russia would get a major boost as well. These countries would see their energy costs decline, although not nearly as much as America would. This more prosperous Europe would provide a market for more American products and would further help the American economy.
f. As an additional bonus, the countries that support Islamic terrorism would see their incomes fall. Iran would be squeezed for example. Tens of billions of dollars that now flow to these lands would no longer end up in their coffers.
This is clearly the way to go.
Much has been said about using oil and gas as weapons against Moscow. Many of the commentators scoff at the idea and point out that moves in the energy field will not force the Russians out of Crimea. That is a rather short-sighted outlook. Bringing down energy prices is a long term strategy to defang the Russians. It will not save Crimea from being overrun, but it may save Kiev and the rest of Ukraine. It will also protect countries like Poland, Lithuania, Latvia, Estonia, Romania, Slovakia and the others who fear Russia will visit their nations next.
Let's look at how this strategy would work. First of all consider the steps that the USA could take on its own:
1. President Obama should immediately approve the Keystone XL Pipeline. This would enlarge the world's daily oil production by 1% at the end of three years. That may not sound like much, but it is actually huge. Most oil usage remains the same even if the price rises or falls. That means that even small increases in production can lead eventually to large drops in price.
2. Obama should also immediately open federal lands to drilling and simplify and expedite the process for obtaining drilling permits. Environmental constraints should not be abandoned, but the endless red tape, extra expense and moratoriums used to prevent most drilling on the millions of acres of federal property have reduced America's oil output by an estimated one million barrels per day, an amount larger than the flow in the Keystone pipeline once it is completed.
3. Obama should take steps to expedite approval of permits for the export of natural gas. America has enormous reserves of natural gas, the largest in the world. Right now, production in America is so large that drilling for this resource has almost ended. That glut has kept natural gas prices low for many years now. America's enormous reserves of low cost natural gas could easily be shipped to Europe so as to supply a significant percentage of the energy needs of that continent. Shipping that gas is expensive; the estimates are a cost of $6 per unit of gas that only cost about $4.50 on the market at the moment. Even with those high shipping costs, however, American gas could be sold profitably in Europe for $11. Compare that with the current price in Europe of gas from Russia of roughly $18. Obviously, everyone in Europe who could buy $11 gas from America would choose it over $18 gas from Russia. The price for the two would quickly move towards each other. Let's assume that the end result would be a price of something like $13. Such a move would take nearly all of the profit out of the gas Moscow is selling. The blow to Russia's power would be immense.
4. America should encourage Saudi Arabia to increase its oil output. Russia has supported the countries who are the greatest threats to the Saudis, namely Iran and Syria (the Assad regime). The Saudis should be convinced that a concerted effort to lower world oil prices will greatly weaken the Russians. Further, a lower oil price on world markets will also be a major headache for the Iranians.
5. Steps should be taken to promote the switch to the use of natural gas to fuel trucks, buses and other large vehicles across America. This move is already underway, but support from the federal government could greatly expedite the process. This is the single largest change America could make which would significantly reduce the need for oil in our economy. The other conservation moves like fluorescent light bulbs or extra insulation in homes do not have that effect and need not be the focus of our efforts. Less than one percent of America's electric power comes from oil, so more efficient light bulbs have no appreciable impact on the use of oil. A similarly small number of homes are heated with oil these days, so insulation is another area that has little impact. So too, the use of solar or wind energy have essentially no impact on oil use and oil prices.
If these steps were taken, consider the results:
a. The world price of oil would almost certainly fall. No one can predict exactly where that price would end up, but a likely area is at roughly $80 per barrel. That is about a 25-30% reduction from the present price. The drop would not come in one week or one month, but rather over a few years.
b. The price of natural gas in Europe would drop by more than 25-30%. The volume of Russian gas sold in Europe would also fall dramatically.
c. The income Russia earns from its energy exports would be cut at least in half and maybe by even more. Remember that the price drops for oil and natural gas would not cut the costs incurred by Russia to produce those products. The entire price drop would come out of the profits earned by the Russians. Instead of wallowing in huge energy profits, Russia would suddenly find itself squeezed for cash.
d. America's economy would get a major boost. First of all, we would have the profits earned from the big increase in energy production. Remember, those profits do not go just to big oil companies. hundreds of thousands or even millions of people would get royalties from the production of energy on their land. The federal government would get billions upon billions of dollars in both tax and royalty revenues from the new production. Millions of jobs would be created in the energy industry and all the other areas of the economy that supply goods and services to the energy industry. Lower oil and gas prices would put cash into the pockets of the average American who would spend less on filling his or her car. Economic growth would be more than 1% higher each year, a fact which would lower unemployment in dramatic fashion.
e. Europe's economy outside Russia would get a major boost as well. These countries would see their energy costs decline, although not nearly as much as America would. This more prosperous Europe would provide a market for more American products and would further help the American economy.
f. As an additional bonus, the countries that support Islamic terrorism would see their incomes fall. Iran would be squeezed for example. Tens of billions of dollars that now flow to these lands would no longer end up in their coffers.
This is clearly the way to go.
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