In Time of Crisis, Europe Leans on American Energy

Dustin Meyer
Posted September 16, 2022

The Russian invasion of Ukraine has thrown global natural gas markets into crisis. The chart below shows price indices for Asia, Europe and the United States since January and reveals just how dire the circumstances are, especially in Europe and especially heading into winter.

Prices in Northwest Europe (represented by TTF) typically hover near $10 per million British Thermal Units (MMBTU) but this year have averaged $41/MMBTU and $62/MMBTU since July. At the end of August, TTF rose to a frightening $100/MMBTU – the equivalent of $580 per barrel of crude oil (bbl). (FWIW, the record oil price is $147/bbl, set in 2008).

To say these prices levels are unprecedented is a considerable understatement. Put simply, natural gas markets have never seen anything like this, and it is causing enormous economic pain – skyrocketing energy bills for industrial users, massive escalation in power prices and over the coming winter, much higher home heating bills.

As has been the case since the onset of the shale revolution in the late-2000s, U.S. natural gas markets remain largely insulated from global price escalation – as evidenced by the green Henry Hub line above. That’s not to say the U.S. isn’t connected to global markets. In fact, the U.S. is the world’s largest exporter of liquefied natural gas (LNG) and a major pipeline exporter as well. What it shows is that U.S. natural gas production is so massive that we can simultaneously meet global demand while still keeping domestic prices affordable for American families and businesses. This is a remarkable achievement and illustrates what real energy security looks like.

Unfortunately, many of our allies find themselves in the opposite position. After years of dependence on foreign suppliers, they’re now deeply vulnerable to Russia’s ongoing weaponization of energy. Europe is stuck. Demand/supply problems that predate the invasion in Ukraine have been greatly exacerbated by the sharp reduction in Russia’s natural gas flows to the west. With winter approaching, New York Times columnist Thomas L. Friedman captures the dynamic well:

[Vladmir] Putin thinks he’s found a cold war that he can win. He’s going to try to literally freeze the European Union this winter by choking off supplies of Russian gas and oil to pressure the E.U. into abandoning Ukraine.

As the crisis deepens, there are few good short-term solutions. To its credit, the European Union and member countries are doing all they can. Measures proposed this week include the rationing of energy during peak hours, price caps, windfall profit taxes. Some nations have begun bracing themselves for winter (Great Britain and France are two prominent examples). While some of the EU proposals are reasonable, few are likely to have a major immediate impact.

This is not a market design failure. It is a fundamental mismatch between demand and supply. It may sound overly simple, but the clearest solution to the underlying problem is increasing natural gas supply – and doing so as swiftly as possible. That’s where American energy – American natural gas, especially – can play a leading role.

Replacing Russian natural gas will require massive investment. Given the scale of our resources, America is best positioned to be the leading supplier driving this effort. Again, we’re already leading the world in LNG exports; we must now significantly expand that capacity, which we’re already on our way to doing.

But to do even more, we need smart and consistent policy support here at home. For starters, U.S. policymakers should state clearly and without equivocation that we are committed to supplying the world with natural gas both now and in the future. This is a message our allies need to hear from policymakers across the political spectrum.

Friedman is on point again in recognizing the importance of a clear message to our allies:

“U.S. energy policy today has to be the arsenal of democracy to defeat petro-Putinism in Europe, by providing desperately needed oil and gas to our allies at reasonable prices so that Putin cannot blackmail them. It has to be the engine of economic growth that provides the cleanest and most affordable fossil fuel energy as we transition to a low-carbon economy.”

Conversely, we should not entertain proposals to restrict American energy exports. Exports benefit allies abroad – now more than ever – and benefit American families and businesses by spurring economic growth, job creation and increased production, which helps put downward pressure on prices in a global market.

Neither should Washington impose new taxes on natural gas and oil producers. Increased taxes can discourage new investment and production at a time when more production is needed most. API’s “10 in 2022” action plan further details actions U.S. policymakers should take right now.

The natural tendency in a crisis is to search for immediate solutions to immediate problems. But the best energy policy is focused on the long-term. American energy – more of it for domestic consumers and U.S. allies abroad – should be the key component of that lasting solution. With the right policies and leadership from Washington, it can be.