Can Trump Achieve His Energy Goals?

A U.S. 100 dollar banknote and Russian 10 roubles coins are seen in this picture illustration taken in St. Petersburg, October 22, 2014. Russian stocks fell on Wednesday and the rouble resumed its decline, a day after Russia and Ukraine failed to finalize a deal on gas supplies, and ahead of a sovereign rating review by Standard and Poor's on Friday. Russian indexes had opened higher, reflecting reviving global risk appetite after Wall Street saw its largest one-day gain of the year on Tuesday. But the gain

An energy dominant America and an EU yearning for an Energy Union can find each other, but that will require less ideology and more pragmatism.

President Donald Trump announced his energy strategy for the United States on June 30, breaking from previous administrations’ calls for “energy dependence” with a message of a new U.S. “energy dominance.” Among the objectives of the Trump agenda appears to be an attempt to deregulate energy markets where possible to free up resources for both domestic consumption and large-scale exports. While Trump’s policy on energy may not, in fact, differ much from that of President Obama, its messaging is clearly more celebratory of the natural gas and oil production surge brought about by the shale boom.

Europe, however, continues to contend with critical supply questions. Russian Gazprom’s ongoing position as the major supplier of natural gas to part of Europe has drawn considerable concern from EU policy makers. Diversification of natural gas supplies has been one of the aims of EU energy policy, even though it is debatable whether that means swapping one dominant supplier for another.

Given that the goals of Washington and Brussels could provide mutual benefits, it is worth examining how an “energy dominant” U.S. policy could fit into Europe’s desire for diversified natural gas supply.

EU Natural Gas Market Liberalization and Supply Diversification—an Inconvenient Truth

Inspired by the experience of the United States natural gas deregulation in the 1980s, European countries started liberalizing regulated energy markets in the 1990s. For Europe, the takeaway was that companies are best equipped to make investment decisions, facilitate consumer choice, and deliver products and services at competitive prices. Price should be the key driver of investment decisions.

Over the past decade, Europe has suffered a couple of major gas-supply disruptions following commercial disputes between Russian and Ukrainian companies. While Russia was—and remains—the lowest-cost supplier of gas to Europe, the interruptions revitalized concerns about dependence on natural gas from Russia, in particular in countries in Central and Eastern Europe (who had just joined the EU). It also raised alarms in Washington, where concerns about Europe’s dependence on Soviet natural gas date back to the early 1980s, where is when they were largely ignored.

Europe’s strategy to deal with gas-supply risk rests on a number of key pillars, i.e. market integration, strengthening the legislative and regulatory framework, and supporting market functioning and supply diversification. Even though it remains a work in progress, this strategy has clearly provided substantial benefits to Europe. By better interconnecting national markets, facilitating the free flow of gas across borders, investing in additional infrastructure to create access to various sources of supply, streamlining national regulatory regimes, and creating and strengthening a European regulatory authority, Europe has become a resilient and, largely, a more liquid gas market. With over four hundred million consumers, it is a market that attracts competitive companies, and those who do not play by the rules end up in court, as Russian state-owned Gazprom has discovered on multiple occasions.

However, not all has worked out as hoped. One of aforementioned key pillars, that Europe would become some sort of playground where dozens of suppliers would compete for clients, akin to the United States, has not materialized. Instead, EU gas demand is still catered by domestic supplies and supplemented by a couple of major external suppliers, most notably Russian Gazprom, but also Algerian Sonatrach and Norwegian Statoil. This expectation was never realistic, given the liberalized market structure. Price dictates the preferred suppliers and the most competitive suppliers, hence, feature prominently. With dwindling domestic production—especially after the Dutch decision to scale down production following a series of earthquakes and public opposition—this trend will likely be reinforced in the coming years.

These trends have put some European policymakers in an awkward position given Russia’s forays into Ukraine and other external activities over the past three years. However, despite that growing wedge between the EU and Russia at the political level, and regardless of how many policy memorandums and research notes call for supply diversification, these will not change the actual flow of natural gas. All realistic scenarios for the EU’s future gas supply include significant volumes of Russian gas. Despite the security concerns, the Russian price is just too competitive for the conceivable future, and a substantial share of demand continues to be tied up in long-term contracts.

U.S. Natural Gas Goes Global