Is Natural Gas the Weapon of the Future?

The abundance of U.S. natural gas gives Americans the ability to fight fire with fire.

Mar 6, 2014 at 2:47PM

Last week, Russia reminded the world of the role that natural resources play in politics. Despite warnings from leaders across the world, the resource-rich nation moved forward with a unilateral act of aggression against neighboring Ukraine – and faced little more than a slap on the wrist as a result. The reason for this is clear: Europe is dead in the water without Russian natural gas.

Many were unimpressed with the Western response to the "invasion," as well as the implied impotence of these nations in light of their dependence on Russian energy. And when you look at what happened, it's easy to see why: A country with interests contrary to those of the Western world effectively wielded its resources to take what it wanted – not exactly the type of politics you'd like to see in the 21st century.

The best offense is a good defense
If Russia (or any other country) truly wishes to use its natural gas as a weapon, the question then becomes how to fight back. For many, the answer is obvious: American natural gas.

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Source: Sempra Energy

The prospect of using our own gas reserves as a political tool has already been tossed around among experts and policymakers. Richard Haass, President of the Council on Foreign Relations, touched on the possibility of ramping up our energy exports at the IHS CERAWeek energy conference earlier this week: "If we don't see the Russians pulling out, we could see the idea raised of changing U.S. energy policy to export crude and increase the number of countries that could receive gas exports."

And the idea goes beyond simply bailing out Europe. Just as the EU relies on Russia for its energy imports, Russia relies on Europe for its energy exports. Gazprom (NASDAQOTH:OGZPY), Russia's gas giant, accounts for almost a tenth of the country's GDP; the energy sector as a whole contributes 65% of exports and around a quarter of GDP. Removing a significant chunk of this market would be disastrous for the Russian economy, and nearly half of all Russian trade involves Europe.

Too little too late?
But there are obstacles to deploying this strategy. First, Europe doesn't have the infrastructure to receive large amounts of U.S. gas, and U.S. LNG export facilities are still years from being able to supplant Russian gas in Europe. Government approval of additional export facilities has been painfully slow (at least for supporters of gas exports). So far, only six projects have been approved for LNG exports to countries without free trade agreements, with Sempra Energy's (NYSE:SRE) Cameron LNG project being the latest addition.

"If this were a situation where we wanted to use our natural gas opportunities as political leverage, we're not in that place now," said Senator Lisa Murkowski of Alaska earlier this week. "I'm not saying we need to go out there and throw some sharp elbows, but I do think we need to be aware of what have and how important a tool diplomatically an energy asset can be."

Bottom line
Certainly, the interdependence of modern global markets makes trade warfare complicated. Just as we can do damage to the Russian economy by driving down oil and gas prices or stealing market share, so too can they damage multinational corporations with Russian exposure. The point isn't necessarily that we punish rogue states with unfavorable trade policies, but rather that we make this an available option. If done right, this could work as a form of deterrence, similar to the effect of nuclear proliferation: If Russia knows we can crush their economy, they're less likely to test our willingness to do so.

In the end, U.S. natural gas export policy should come down to whether the potential economic and political benefits of shipping gas overseas outweigh the costs of more expensive gas at home. The answer is far from black and white, but Russia's recklessness in the Crimea has without a doubt added a twist to the debate. By highlighting natural gas as its greatest leverage in the current conflict, Russia has raised the possibility that the next cold war could be fought not via nuclear stockpiling, but instead via global energy markets. 

Another American Super Weapon
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Robert Coleman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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