Europe is facing a serious economic downturn, with industrial production and real wages both falling rapidly and factories in key industries such as chemicals, steel and machinery closing. The rapid increase in energy prices due in part due to the European Union’s (EU) restrictions on Russian energy imports and President Putin’s response further slowing exports have combined with the EU program to move to a more carbon free economy to produce skyrocketing energy prices. The looming economic crisis now threatens political support in Europe for aiding Ukraine in its war with Russia. The U.S. could help alleviate the energy-related crisis in Europe, but only if the Biden administration rapidly shifts to more consistent support for domestic production.
Despite years of warning from American leaders, Europe remained highly dependent on Russian energy, with 45% of EU gas and 27% of petroleum and 40% of coal imports originating from Putin’s empire in 2021. Since the war in Ukraine, Northwest Europe has seen an 80% reduction of Russian energy exports brought on by both EU sanctionsand Russia-imposed supply reductions. Furthermore, the new European objective announced in its REPower EU plan to reach independence from Russian fossil fuels by 2030 heightens the risks of a potential energy crisis resulting from politically friendly energy markets being incapable of sufficiently increasing production to meet demand.
The negative impacts of unmet European energy needs are hard to understate. Warnings that Russia may completely cut off European gas provisioning by this winter aggravate risks of power outages and energy rationing throughout Europe, and have caused Germany and other EU countries to preemptively begin implementing crisis mitigation measures such as rationing gas supplies to manufacturers. If Europe faces a harsh winter without adequate heating for its citizens, resulting political dissatisfaction risks undermining European resolve in support of Ukraine, which is already questioned in Western Europe and is waning in the East. Furthermore, heightened energy costs and overall scarcity are negatively impacting European industrial production, contracting 1% in March and growing only 0.3% in April. Production in the Euro area saw a 2% decline in April. Overall, a European economic downturn will also likely increase the odds of global recession.
The Biden Administration has attempted to ramp up energy exports to assist European allies. The proportion of U.S. LNG exports directed to Europe increased from 34% to 74% in 2022 and monthly oil shipments to Europe jumped to their highest level in half a decade. However, Biden’s current energy policy remains clearly opposed to increased fossil fuel production and processing and thus severely constrains capacity to help alleviate Europe’s mounting energy crisis. This incoherence is stunningly illustrated in a June 15th interview of Energy Secretary Jennifer Granholm. She simultaneously demanded that oil companies invest massively to increase oil production while also reiterating ambitions to shut them down within the decade. America’s international efforts to increase global energy supply may also be detrimental politically and environmentally in the long run, as they have focused on expanding oil exports from hostile countries like Iran and Venezuela. Biden is now having to do an embarrassing geopolitical turnaround to request increased production from Saudi Arabia. Furthermore, the majority of current idle oil refining capabilities reside in China and could result in an unwanted bolstering of Western dependence on the Middle Kingdom.
A pragmatic course correction of U.S. Energy policy that takes the global energy supply reality into account must thus move towards bolstering overall production, processing, and transportation capacity that can enable America to become a reliable supplier of Europe for the long-run. Indeed, oil gas will continue to be a necessary resources even in the International Energy Agency’s best Sustainable development scenario. U.S. producers are measurably more efficient in terms of environmental impacts than countries like Russia, Iran and Venezuela. Such a policy shift ought to include removing Biden-era roadblocks to increased capacity such as limiting acreage for oil and gas lease authorizations on federal land, heightened climate and environmental regulatory considerations for new interstate natural gas facilities and pipelines, as well as biofuel mandates. More proactive short-term policy should include helping companies activate already-drilled oil wells as well and Jones act waivers. Efforts to discourage capital markets from investing in the oil and gas sector need to be radically rethought.
The U.S. and Europe will both pay a high economic price if such a new program is not adopted quickly. Weaker growth in the West will undermine support for Ukraine’s heroic resistance to Russian aggression. Without increased U.S. production and exports to Europe, it will continue having devastating supply sourcing issues and increasingly become reliant on China’s growing capacity to export refined petroleum products using discounted Russian oil for competitive advantage. This constellation of forces will in turn sap the new-found solidarity of the U.S. and Europe in support of Ukraine and also arrest any evolution toward U.S.-European convergence in policy to combat the growing economic and political power of Russia’s main ally: China. Without a quick turnaround in the Biden agenda to weaken the domestic oil and gas industry, U.S.-European cooperation on global issues is in danger of unraveling.
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