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Who Will Win Europe’s Energy Cold War? Russia And The U.S.

Mark P Mills, Investor's Business Daily

Like an impetuous Prospero, President Trump stirs up tempests seemingly with little concern for the consequences. Speaking at the United Nations yesterday, Mr. Trump doubled down on the assertion he made this past summer at the NATO summit in Brussels when he warned that Germany could become “captive to” Russia because of the Nord Stream 2 gas pipeline.

Diplomatic style aside, there was method behind the U.S. president’s perceived madness. Mr. Trump knows Europe needs natural gas, and by playing on fears — merited or otherwise — that Russia is once again a threat to peace in Europe, he’s hoping Germany and the European Union will import more of it from the U.S.

Russian President Vladimir Putin has countered with a diplomatic charm offensive that’s included two meetings in the past four months with German Chancellor Angela Merkel — one last month lasting three and a half hours — and a recent visit to Austria where he brought a troupe of Cossack singers and danced arm-in-arm with Foreign Minister Karin Kneissl at her wedding.

Set aside Mr. Trump’s diplomatic offense, and Mr. Putin’s dancing skills, and what will likely unfold on the European front is a kind of energy realpolitik, where economic necessity and geopolitical reality, not ideology, wins the day.

The stakes are high for Russia. Oil and gas comprise the majority of its export revenues. The EU’s stakes are high too. Once Nord Stream 2 is operating, about 40% of all Europe’s gas imports will in fact come from Russia.

EU And Russia: Co-Dependents

Yet despite their co-dependency, the EU and Russia are — per the European Council on Foreign Relations (ECFR) — in “an open battle over the norms of international conduct.” According to a recent PEW survey, 78% of Europeans “lack confidence” that Russia would “do the right thing” when it comes to world affairs. As the ECFR also noted, winning this battle won’t come from “countering Russia” but from “improving Europe’s resilience.”

Mr. Trump sees opportunity in the Europeans’ distrust of Russia. The global energy sector has undergone massive upheaval, in large part because the U.S. is now the world’s biggest natural gas producer and a rapidly growing exporter. Until this transformation, the primary option for Europe in its quest to minimize Russian energy dependencies was the Middle East, with all the geopolitical baggage that entails.

Self-Interest Vs. Self-Interest

EU officials maintain that the U.S. is merely engaged in “self-interest” as it promotes its liquefied natural gas (LNG) exports. Of course it is. And Europe has its own self-interest here. It’s precisely when counterparties have mutual self-interests that sensible trade and business relations can be forged.

As it happens, Europe doesn’t need to build expensive LNG import terminals in order to take advantage of the energy transition in the U.S. The existing fleet of EU terminals is operating at one-fourth capacity. Using the full capacity would bring in nearly three times as much natural gas as the Nord Stream 2 pipeline is designed to carry.

In recent weeks, EU officials have indicated some receptivity to the idea of purchasing American LNG — as long as pricing is “competitive.” Yes, Gazprom pipes can deliver gas to Europe at a lower cost than even the record low prices associated with LNG ships from America. But EU leaders have elsewhere embraced policies that entail paying a premium for important non-price-related attributes: Here, resilience and diversity are worth something.

Based on the current price spread between U.S. LNG and Russian gas, even if Europe were to fill all its idle import capacity with American LNG, annual overall EU energy import costs would rise less than 5%.  In the long run, that would be a bargain as a resilience hedge. Perhaps EU’s diplomats could negotiate some of that spending as a strategic offset to increasing NATO dues.

LNG: Should EU Buy American?

There are those who believe that Europe could diversify by accelerating its alternative energy strategy. But even if wind, solar and other alternative energy sources exceed expectations, gas and oil will still be the main source of Europe’s energy for ages yet. Meanwhile, the imminent collapse in North Sea gas production will decrease Europe’s domestic supply by more than the capacity of Nord Stream 2.

How will this Cold War-like battle to supply Europe’s energy needs play out? Pragmatically, of course, with both a growing mix of LNG from the U.S. and gas piped directly from the Eastern Front. Bear in mind that neither Mr. Trump nor Mr. Putin—like their Cold War predecessors—will be around forever. Words like “captive” and “controlled,” with the right diplomatic underpinnings, could be replaced with “cooperation” and “partnership.”

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