How to reduce Europe’s dependence on Russian energy

It’s time for our political leaders to stop showboating in their efforts to thwart Russia’s threat to Europe’s energy security. Even if well-intentioned, a Senate bill to impose sanctions on foreign energy companies helping to construct a Russia-to-Europe natural-gas pipeline is half-baked and simply won’t work. 

The pipeline, called Nord Stream 2, is now 60 percent complete. It is a joint venture of Gazprom, Russia’s state-owned oil company, with half of the funding provided by “Germany’s Uniper and BASF’s Wintershall unit, Anglo-Dutch Shell, and Austria’s and France’s Engie,” according to Reuters. If and when it’s completed, the new pipeline will allow Russia to make good on its plan to end gas transit through Ukraine, depriving it of $2 billion to $3 billion a year in transit revenue — and cutting a vital link between that country and the West.

U.S sanctions are unlikely to stop the pipeline’s expansion before it’s finished. Not only would sanctions have negligible effects on Russia, but they would harm America’s banks and other companies doing business abroad. Under the bill, sponsored by Sens. Ted Cruz (R-Texas) and Jeanne Shaheen (D-N.H.), the targeted foreign companies would be unable to secure credit from American financial institutions and be denied access to their U.S. properties.

President Trump has said he is considering imposing sanctions himself to “protect Germany from Russia.” But sanctions are protectionist, no matter what justification is advanced.

Ironically, sanctions against Nord Stream 2’s builders are on the table at the same time U.S. Energy Secretary Rick Perry is in Europe to promote exports of America’s liquified natural gas (LNG). Customers there, like Polish Oil and Gas Company (PGNiG), already are signing or negotiating long-term contracts to purchase large volumes of gas from the United States.

That good news means that the United States has a more effective strategy for counteracting Russia. Rather than imposing sanctions, we could expand production of our huge domestic natural-gas deposits and dispatch fleets of tankers carrying LNG across the Atlantic. Such action would loosen Russia’s economic grip on western European consumers. In fact, that’s already happening. Last winter, U.S. companies shipped 48 LNG tanker cargoes to Europe. But we could export much more.

The lessons of the periodic oil price shocks America learned so painfully from decades of dependence on OPEC’s oil reserves easily can be applied to Russia’s threats to Europe’s energy security. If someone had suggested 30 years ago that the United States could disrupt Europe’s growing dependence on Russian natural gas by encouraging exports of American LNG, the idea would have been dismissed as pure fantasy: in the 1980s we were importing natural gas.

Nowadays, thanks to the shale revolution, the United States has turned the corner as an energy producer. The impact of that turn is not measured just in domestic job creation and economic growth. We have become the world’s leading producer of natural gas, and the output expansion has transformed America into a global energy giant. According to the Energy Information Administration, U.S. natural-gas exports increased 285 percent from 2007 to 2017, as domestic producers began shipping natural gas overseas for the first time in 60 years.

American LNG promises to alter the global energy picture dramatically. After all, we are in a position to offer Europe an alternative to Russian natural gas, thereby stabilizing Europe’s supplies and maybe its politics. As is true here at home, European public utilities are substituting natural gas for coal and nuclear power to keep the lights on.

Largely owing to declines in European production, Russia currently dominates the supply of natural gas there, accounting for half of western Europe’s and 75 percent of eastern Europe’s gas purchases. The Nord Stream 2 project will double the capacity of an existing pipeline to deliver more Russian gas through the Baltic Sea to Germany, and U.S. politicians are correct to warn that larger shipments will strengthen Russia’s grip over Europe’s energy supplies.

U.S. sanctions on German, Dutch and French companies are both unnecessary and unwise, crippling their American financing options and undermining our trade relations with the collaborating European energy companies.

Congress ought to recognize that our prospects for selling natural gas to Europe never have been brighter and that unleashing America’s vast gas resources could limit Russia’s ability to leverage its own reserves as a coercive geopolitical weapon. Penalizing participants in the Nord Stream 2 project would have precisely the opposite effects. 

William F, Shughart II, research director of the Independent Institute, is J. Fish Smith professor in Public Choice at Utah State University’s Huntsman School of Business.