Europe’s Never-Ending Natural-Gas Obsession

"Russian gas does not weaken Europe politically, and diversification is not the solution."

The crisis in Ukraine has pushed Europe’s natural-gas hypochondria to new heights. Normally, the conviction that Russian gas is a political liability and the subsequent calls for "diversification" do little harm, but the rhetoric has now spiked to extreme levels. The problem is that both the diagnosis and the prescription are wrong: Russian gas does not weaken Europe politically, and diversification is not the solution. Europe should instead focus on boosting its ability to deal with disruptions as the best way to achieve energy security.

The conventional wisdom rests on three claims: Russia could cut or threaten to cut supplies for political gain; gas enriches and emboldens the Kremlin, while threatening Europe’s competitiveness; and commercial ties with Russia undercut a strong and unified European response.

The first claim is the paramount concern, and there is no doubt that a cutoff, intentional or not, would hurt Europe (albeit, the pain would be uneven). But is this real leverage? After all, cutting suppliers is a blunt instrument that escalates a crisis and triggers a reaction—which is why the “gas weapon” has yielded limited political gains for Russia. Ukraine is proof enough: if Russia could control Ukraine through gas, there would be no need for violence. What insulates Europe from a cutoff is not Russia’s need for export revenues, but Europe’s likely retaliation for what could easily be perceived as casus belli.

The second claim is similarly inflated. For one, oil trumps gas in Russia—50 percent of Russia’s export revenues come from oil versus 13 percent from gas. Nor are reduced exports guaranteed to make the Kremlin more conciliatory—politicians often use foreign adventures to distract from economic woes at home. Similarly, there is no evidence that energy costs, for which Europeans unfairly blame Gazprom’s “monopoly,” have undercut European competitiveness; a recent European Commission report found that, “there has been little impact on the EU’s relative competitiveness which could be directly attributed to higher energy prices and the carbon price under the ETS [Emissions Trading Scheme], due to improvements in energy efficiency.”

The third claim—that commercial ties interfere with a pan-European policy—similarly reduces a complex issue (how to deal with Russia) to a single explanatory variable (commercial ties with Russia), even though experience shows us that trade can coexist with or even cause tense political relations. Nor is this solely an energy issue, as the recent furor over French military sales to Russia reminds us. The real concern voiced, however, is about European unity. It is axiomatic that a unified energy policy towards Russia is desirable. But why is that so? European countries have diverse energy profiles and diverse comfort levels in dealing with Russia, so it is hard to see how a common approach might make sense. Moreover, markets require that companies cut their own deals—if not, there is no real competition. Of course, there are some issues best dealt at a European level—but this is different from a common policy towards Russia. It is a policy towards all companies, European or not, rather than a strategy towards Russia.

None of this means that Europe has nothing to worry about, but a somber appraisal of the way that Russian gas affects European politics will lead to smarter policy and avoid overreactions. Nowhere is such correction more necessary than in the persistent call for “diversification.”

Diversification has become shorthand for energy security, even though it is a poor barometer for it. Diversification does not measure how well a country can cope with a crisis. A country can have many suppliers, but if none can provide additional gas in a crisis, then diversification is no good. In fact, European countries have often turned to Russia to offset a shortfall in other supplies (e.g. Libya, Iran, Azerbaijan). In those cases, higher reliance on Russia boosted energy security, as opposed to undermining it.

Diversification can also be costly—after all, diversification means moving away from your usual suppliers, which tend to be the more economical ones. A few years ago, Brazil decided to diversify from Bolivia, but liquefied natural gas (LNG) cost 50 percent more than Bolivian gas in 2013. Poland was similarly ecstatic to sign an LNG contract with Qatar in 2009, but now wants Qatar to lower the price. Diversification for the sake of diversification can turn out to be expensive.

Diversification can also be politically tricky. Many of the countries that supply or might supply Europe bring their own challenges: Algeria, Libya, Egypt, Israel, Cyprus, Yemen, Azerbaijan, Iran, Turkmenistan or Nigeria. Diversification is often assumed to mean replacing “bad” Russian gas with “good” gas, but reality is messier. By courting suppliers, Europe creates new political realities that have to be managed. And diversification can also mean support for practices or fuels with their own environmental (shale, coal) or security (nuclear) baggage.

Pages