Europe Needs Gas, America Needs Oil, Biden Turns A Paler Shade Of Green, Oil Profiteers Urged To Drill

If it weren’t so serious a time, “I told you so” would be the order of the day. American Presidents from Jack Kennedy through Ronald Regan and Donald Trump have warned Germany and Europe about excessive reliance on Russian natural gas. Germany continues to rely on Russia for about 40 per cent of its gas as does the EU, which also relies on Russia for similar portions of its coal and uranium. Germany has shut down most of its nuclear plants, and along with the Netherlands and Bulgaria, banned fracking. As has France, which gets 70 per cent of its energy from some 56 operable nuclear power plants, putting Macron in a position to talk more frankly with Putin than can Germany’s Olaf Scholz.

American oil and gas men have been warning President Biden on excessive reliance on the sun and wind while stifling development of domestic oil and gas resources as part of a programme to cool the planet and cater to his green left. He is now shopping the world for oil but not finding much so, in “a war-time bridge” to higher production from domestic oil companies (the Dallas Fed is predicting a 6-8 per cent production increase this year), will be tapping the nation’s Strategic Petroleum Reserve for a record one-million barrels every day for six months[1] — equal to about one-third of the fall-off in Russian supply —  in an effort to bring down gasoline prices and increase his party’s prospects for retaining control of congress later this year.

Boris Loves Nukes … If They Are Small

British economists warned their government that it was unwise to end subsidies to its major natural gas storage unit, a warning that was ignored and leaves the country dependent on hand-to-mouth deliveries of natural gas at sky-rocketing prices that, along with a rise in food prices, are forcing Brits to choose between heating and eating as one wag put it. Prime Minister Boris Johnson has decided that the answer is nuclear power, with the private sector to build 16 Small Modular Reactors (SMRs) to fill the energy gap. Cost and amount of subsidies demanded to be determined. Fracking remains banned, although soaring natural gas prices are causing a rethink, and have prompted postponement of plans to pour concrete down the wells mothballed in 2019.

In short, position papers urging a reduction of reliance on Russian gas were ignored, leaving Putin de facto foreign minister of much of Western Europe. Then came the Russian president’s decision to end the geopolitical settlement that ended the Cold War.

Proving Woody right. In his movie “Manhattan”, when a liberal at a museum opening suggests that a “satirical piece … on the op ed page of the [NY] Times” has coped with a planned Nazi March in New Jersey, Allen responds, “Well, a satirical piece in the Times is one thing, but bricks and baseball bats get right to the point.” Position papers and data laying out the danger of dependence of Russian gas were one thing, but the invasion of Ukraine gets right to the point. The bad guys – Putin, Saudi and Opec leader Mohammed bin Salman, Iran’s Ayatollahs – have Western democracies over a barrel.

Biden Pivots, Half Way Around

Biden, who removed Trump’s sanctions that halted  the construction of Nord Stream 2, the war-stalled pipeline that still might increase Germany’s reliance on Russian gas, has done a pivot. He is doing his best to make it difficult for Germany and others to pay for Putin’s natural gas. He is doing his best to persuade EU countries to buy American LNG. He is doing his best to persuade the OPEC cartel to relax restrictions on oil production.

That effort includes the removal of barriers to the delivery of American missiles to the Saudis, so far with no effect on crown prince Mohammed bin Salman’s annoyance at being labelled “a pariah” by the President. Biden is hoping to strike a new deal that will increase Iran’s oil output, enabling the Ayatollahs to buy more missiles to aim at the Saudis who will be using American-supplied missiles to shoot down the missiles Iran purchases with the dollars it gets from selling oil to America.

OPEC, in which Russia remains a member in good standing because the cartel, with a straight set of faces, says it does not do politics, sees no reason to deploy its idle capacity to deviate from the plan it set for steady modest increases before Putin decided to take the first step in re-establishing something akin to the Soviet Union.

Perhaps most significantly for the long-run, Biden is recognizing that his policy responses to the siren song of his party’s green machine are not what the US economy needs, certainly not within the time frame the greens have in mind.

His regulators have ended their stall on the issuance of permits for the construction of some new natural gas infrastructure. His energy secretary is asking oil men to step up the development of America’s fossil fuel resources – “get rig counts up” – although the government has, paradoxically, delayed new offshore leasing until October of next year and the President continues to speak of oil men as profiteering enemies of the state.

But coherence has never been a hallmark of an administration that seems to have a full-time team devoted to walking back Bidenisms. Perhaps this substitution of contradictory chaos within the administration team is the best we can hope for, and will prove to produce more oil than would unified backing for Presidential hostility to an industry he says he wants to “make additional investments to help with supply”, investments the President on other days would doom to becoming stranded assets.

Markets Tempt Drillers To Risk Resurgent Greens

Markets move faster than government bureaucracies: S&P Global reports that record high internal rates of return are encouraging US producers to deploy more rigs and accelerate new well drilling and completions. These returns appear to be high enough to offset the risk that the investments will end up as stranded assets if greens get control of the policy machinery. Remember, it was John Kerry, Biden’s climate czar, who worried about “massive emissions consequences” of a Russian invasion of Ukraine, and its distraction from work on climate change. The oft-quoted “If the only tool you have is a hammer, you tend to see everything as a nail” comes to mind.  And several members of his climate team deem responding to the current crisis by investing in natural gas infrastructure the death knell of the fight against climate change.

Trade Policy Ain’t Going To Be What It Used To Be

Biden is also allowing Katherine Tai, his trade representative, to fashion policies that, if properly conceived and implemented – a big “if” – can move the country along the path to a less emissions-intensive economy, freer of dependence on unfriendly powers, without crippling it in the here and now. Tai believes that globalization “has not taken us to a place where we feel more secure … we aren’t comfortable relying on” our trading partners. Even in a world in which reliance on fossil fuels is reduced, and our domestic supplies are adequate to our needs, we will need materials and resources largely controlled by our adversaries, unless we develop domestic mining and processing facilities. Batteries might replace oil and gas, but they are as vulnerable as those fuels to supply interruptions. The risk of government intervention producing enormous inefficiencies cannot be ignored, but neither can the risk of supply cut-offs by adversaries.

Risking Government Incompetence  

Politics and perhaps conviction prevent the President from falling off the climate-change bandwagon. But he now seems willing to slow it down to give investors, private and public, time to ramp up alternative sources of energy. That time might well be shortened by market forces, that seem to have driven prices of oil and gas up to levels that  reflect the security and environmental risks associated with their use. The risks that a too-intrusive government will duplicate the competence it displayed in the withdrawal from Afghanistan are obvious.  But so, too, are the risks of continuing down the road we have been travelling.

Irving Kristol, whose wisdom informed policy debates for decades, distinguished between problems, which can be solved, and conditions, with which we must learn to live. World energy markets are just such a condition.