COMMENT: A moment in time—Energy trade with Russia

April 14, 2008
The term “energy crisis” has been a part of our economic lexicon since the early 1970s.

The term “energy crisis” has been a part of our economic lexicon since the early 1970s. It is time for us to realize that “crises” don’t last 30 years unless they are nurtured by perpetually poor public policy.

For the past 35 years, whenever high energy prices caused public consternation, politicians have been quick to inform the American electorate of a planned path to energy independence via a familiar and recurring set of regulations, government subsidies, and technological advances.

Over this same period, global energy markets have responded to these price signals with increasing supplies of conventional fuels. Predictably, the high prices that sparked all the rhetoric and activity soon subside. Quickly thereafter, the US government and the consumer lose interest in “advanced” technologies and return to old buying and consumption patterns. Any hope of effective public policy goes back into hibernation.

Had we acted prudently and consistently back in 1970, our current condition would have been more manageable. But we didn’t. It is time we devise a management approach to this problem and stop pretending that there is an early homegrown solution. Those who sell the prospect of quickly found energy independence through investment and tax incentives are simply taking advantage of the public at best.

The US, an oil exporter for much of the last century, set the pace for building an economy and society on ample and inexpensive oil and gas. Europe, and now Asia, have followed suit. But US self-sufficiency—energy independence—is no longer within our grasp at current levels and forms of consumption, prevailing prices, and available resources and technology. It may never make economic sense.

With instability in the Middle East and declining production domestically, particularly from some of our traditional suppliers, the US must diversify its energy supply sources. This is all the more urgent as energy demand from China, India, and elsewhere is increasing rapidly and new supply sources are shrinking and becoming more geographically concentrated.

The growth of global energy consumption to support broad improvements in living standards cannot be denied to the billions of people around the world whose economies are now realizing the benefits of decades of emerging economic progress.

Collectively the same size as the US market, the emerging economies are growing three times as fast, and their continued expansion will have a huge impact on future energy demand. This will not only require changes in energy consumption patterns at home and abroad, but also a sustained policy of interdependence and diversification, not xenophobic independence, among energy producing and energy consuming nations. While asymmetries may exist in specific trade relationships, the policy of interdependence and diversification among all trading partners creates net benefits for each and all.

Energy independence is not only an improbable goal, but it also leads to inconsistencies in our foreign economic policy that can blind us to potential opportunities. In pursuing this objective we deliberately reverse the economic trends of the past several decades; trends that have led to growing interdependence and its numerous benefits among both developed and developing countries in the spheres of trade, finance, and energy. Former Federal Reserve Chairman Alan Greenspan pointed to growing global trade among a widening range of market participants, more than fiscal or monetary policy, as primarily responsible for constraining domestic inflation and fueling economic growth over the past two decades.

It is within this context that we in the US must engage Russia as a central player in the global energy economy. For the US, as historically in Western Europe, Russia presents an opportunity for diversifying, not concentrating, the political risks of our reliance on energy imports. Russia has supplied Western oil markets for more than a century; it now reliably supplies Europe with a quarter of its natural gas consumption. Despite the rhetoric from all sides and sensationalized Western press editorials on the perceived threats that Russia presents to US and Western strategic interests, Russia’s long-term social and economic growth and security are much better served through economic engagement with Western economies than through isolation and confrontation.

Acknowledging these bilateral benefits in 2002, Presidents George W. Bush and Vladimir Putin designated energy cooperation as a major joint priority. Our focus on this important goal has now been lost as other issues have crowded the center stage. Selling fear rooted in the past does not protect the future. The US needs to revive this sensible bilateral policy and re-engage Russia in order to foster an interdependent relationship based on shared concerns and reciprocal needs.

OAO Gazprom, Russia’s largest oil and gas company, now comes knocking on North America’s front door with offers of competitively priced natural gas delivered as LNG. As the US and Canada appear to be at best on a treadmill when it comes to natural gas production, such diversification of supply sources should be welcome. Partial reliance on Russian gas supplies is not a threat to our economic security, but an act of supply diversification that reduces overall energy security risk and brings benefits to both countries.

Gazprom is not a passive participant in world energy markets, but few have ever accused the titans of the energy industry, irrespective of where they are domiciled, of engaging in a gentleman’s sport. The energy business is brutally competitive. Gazprom has been financially successful in its energy export business through tough negotiations with its peers and counterparties. If this does not make it cuddly in the eyes of the West, perhaps that is the fate of all major international energy firms, which must pursue their commercial objectives in a highly politicized environment. And note that all national governments, including the US, actively promote and assist homegrown energy firms in pursuit of national interests.

It is time to reap the benefits that an interdependent policy would offer. For the foreseeable future, the US must depend on its trading partners to supply a large share of our energy supplies, primarily in the form of oil and gas. It makes perfect sense to ensure that these sources are as diversified as possible while we develop and deploy truly game-changing technologies and more energy-efficient practices.

The US and Russia must acknowledge the symbiotic value of bilateral energy trade and its role in expanding commercial and economic relations that will build and sustain mutual trust between our two countries. It is my hope that dialogue replaces the noise so that we can capitalize on this moment in time to promote economic security for both our nations.

The author

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Timothy Sutherland, founder of Pace Global Energy Services LLC, has guided the development of Pace into an internationally recognized consulting and asset management firm with extensive client relationships throughout the energy, transportation, and financial communities. With his worldwide experience, Sutherland has led the firm’s development in the areas of strategic planning and strategy implementation, comprehensive fuel supply planning and acquisition, financial structuring evaluation, and private placements within the energy and transportation industries. He is an active participant on energy industry and industrial panels dealing with the market impacts of competitive restructuring. Sutherland holds an MBA from New York University.