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Why Obama Should Channel Reagan to Beat Putin

Liz | Wednesday, March 05, 2014 - 2:19 pm

President Obama needs a plan, and fast. Russia’s Putin may have stepped back from the brink in the Ukraine, but the stand-down will likely prove temporary. Time to take advantage of Russia’s over-dependence on energy and wage a petro-battle – one we can win. 
President Obama should declare to the world that we will put every resource behind raising U.S. energy production, aiming to keep a lid on oil and gas prices and whittle away at Russia’s clout in the marketplace. He should announce: 1) approval of the Keystone XL Pipeline, 2) a go-ahead on new LNG export terminals, 3) increased leasing of federally owned onshore and offshore oil and gas prospects, 4) renewed expansion of our nuclear industry, and 5) a moratorium on pending EPA regulations that would shutter many of our coal-fired power plants. Finally, he should emphasize that his administration will fast track every one of these projects.

Take that Mr. Putin!

Related: Russia Ties to Ukraine Go Much Deeper than Gas

Yes, the environmental lobby will go ballistic. But, the president can channel Ronald Reagan, likening his plan to the way his GOP predecessor undermined Russia economically, by forcing a military build-up, and brought the country to its knees without a shot fired. He can explain that if we do not confront Russia’s aggression today, we will pay a higher cost tomorrow when one of our NATO allies comes under siege. Also, the U.S. will benefit from lower energy costs, and we will be creating jobs. Win-win.

Oil and gas accounts for some 70 percent of Russia’s exports, and 17 percent of GDP. It also provides more than half of government budget revenues. That unhealthy concentration has increased since the mid-1990s, when oil accounted for less than half of total exports. Russia’s dependence makes the country ultra-sensitive to shifts in energy prices. It also makes it fragile.

In recent months (and before the current Ukraine crisis), the onset of Federal Reserve tapering created chaos in Russia, sending the ruble down almost 8 percent against the dollar in January, pushing benchmark bond yields to record highs and forcing Russia’s central bank to intervene and to shift its currency corridor 14 times during the month. These are not signs of strength.

Last year, the Russian economy slowed, with growth estimated at 1.3 percent down from 3.4 percent in 2012. The World Bank is projecting growth of 2.2 percent this year. Inhibiting gains will be a reduction in Sochi-boosted government outlays and a continued outflow of capital. Net capital outflows from the private sector totaled nearly $55 billion last year, up 15 percent.

Related: Could Russian Nuke Tests Start a New Cold War?

Nobody voluntarily chooses to store money in a country with little rule of law – where assets can be snatched, as they were from hedge fund manager Bill Browder in 2006 or from Mikhail Khodorkovsky and the shareholders of Yukos, among many others.

In 2013, Russia ranked 127th out of 177 countries in Transparency International’s Corruption Perceptions Index, tied with Pakistan and Gambia—a measure of how the world views the nation’s public sector corruption. 

Though Putin has paid lip service to increasing transparency and fighting corruption, the government is moving in the opposite direction. A recent study by the Gaidar Institute for Economic Policy noted that by 2016 nearly one quarter of the country’s federal spending (and 59 percent of military outlays) will be classified, up from 17 percent this year and an average of 11 percent from 2005 to 2012. This does not inspire confidence.

One of Russia’s many “state” secrets is its oil reserves. In defiance of expectations, oil output reached a record 10.5 mb/d last year and looks likely to remain at a high level in 2014. However, this success stems from a shift to newer, higher-cost fields in Eastern Siberia from established regions in the west, and the use of new technologies to produce shale oil.

Related: The Race for Arctic Oil—Advantage Russia vs. U.S.

Future production may reach to the Arctic, increasingly requiring technical help (and capital) from companies like Exxon-Mobil and Shell, and resulting in a lower take for the government. That means that Russia will be ever more sensitive to fluctuations in oil prices; it will also dictate a need to diversify the economy. 

What should the U.S. do? First, allow construction of the Keystone XL Pipeline, helping industry to access to the world’s third-largest oil reserves — Canada’s Athabasca oil sands. Second, accelerate the construction of LNG terminals, allowing increased exports from the U.S. to compete with Russian natural gas. 

The Obama administration has recently approved several new gas-processing and liquefaction facilities; many more are in the works. Though industry experts estimate that LNG exports will likely rise to 6.3 bcf/d by 2020, a concerted push could significantly up the totals. All told, current proposed projects amount to capacity of more than 18 billion cubic feet per day – only slightly less than total net Russian exports in 2011. 

Next, the president should increase the amount of federal onshore and offshore oil and gas acreage available for lease. U.S. natural gas production rose 20 percent between 2007 and 2012, with production on federal lands (onshore and offshore) falling by about one third and production on non-federal lands growing by 40 percent. Similarly, total U.S. oil production rose by about 1.1 million barrels per day between 2007 and 2012; all of the increase took place on non-federal lands. Some 43 percent of oil reserves are on federal lands and 28 percent of gas reserves– clearly an important future production source. 

Related: U.S. Sanctions Against Russia Are Highly Likely

Our nuclear industry, which provides roughly 20 percent of all U.S. electricity, is in jeopardy of shrinking significantly, with some 30 plants at risk of closure. Some are not economic because of low gas prices; some are old. Ramping up gas exports could stabilize nuclear power, as could a federal determination that this source of clean energy deserves the same support as wind and solar.

Finally, the Obama White House should rein in EPA rules that could shut down a significant swath of our coal industry, which today contributes close to 35 percent of our electricity and which provides households and industry with inexpensive power. New plant construction has already fallen victim to cheaper coal and an aggressive Clean Air enforcement regimen – existing plants should not be put out of business.

This program will be tough for President Obama, who is wedded to a new-age vision of renewable and clean energy. However, in dealing with a 19th century despot, he may well have to temporarily travel back to the future.

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