Free Ukraine by Freeing Energy Markets

Written by Nicolas Loris and Jack Spencer

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Whether military, diplomatic, economic, or otherwise, the U.S. government has an array of policy options to bring to bear in response to Russia’s unacceptable aggression against Ukraine. However, one must not discount the impact that free markets and free trade can 800px-Methanier aspher LNGRIVERSultimately have on the situation.

Much of Russia’s power in the region is the result of its control over energy supplies and distribution systems. Diminishing Russia’s economic leverage over the region should be a key component of America’s response. This could be largely accomplished simply by liberalizing global energy markets. The U.S. has antiquated and unnecessary restrictions on exporting liquefied natural gas (LNG) and crude oil, and Congress should make lifting these restrictions a priority.

Loosening Russia’s Energy Grip

Ukraine understands that energy diversification is a key to its own future. In 2013, the Ukrainian government reached agreements with Royal Dutch Shell and Chevron to explore and develop the country’s two large shale gas fields in Yuzivska and Olesska. Chevron’s 50-year contract consists of a $350 million exploratory phase that could potentially result in $10 billion in investment. Shell’s investment is of similar size, and both would yield significant natural gas supplies in a few years’ time.[1]

But to truly diminish the power that a nation garners from its control over energy markets and supplies, the U.S. needs to lead broad liberalization of global energy markets. This means not only encouraging private-sector development around the world but also allowing for market-driven increases in production in the U.S.

The U.S. could maximize its influence by increasing opportunities for exports. To some extent, this is already occurring as the U.S. is now a net exporter of refined petroleum products, doubling its exports to Europe from 2007 to 2012.[2]

Action Needed Now

Given the five to seven years that approving, engineering, permitting, and constructing a new LNG terminal takes, lifting gas export restrictions might not have a near-term and direct impact on the Ukraine crisis.[3] However, doing so would send an important signal to Russia and the rest of the world. It would show any leader from any country that derives power from controlling energy interests that such strategies will no longer be effective.

Opening markets would provide a diversity of suppliers and greater energy supplies for the global market. This would likely result in lower prices and will certainly mean more choice for countries like Ukraine in the not so distant future. Ultimately, providing that choice would be what diminishes Russian power. Establishing free-market reforms now and increasing energy supplies would help to prevent future incidents and price shocks, not just in Ukraine but across the globe.

There are a number of legislative efforts underway to achieve this objective. Most recently, Senator Ted Cruz’s (R–TX) American Energy Renaissance Act would do so by:

Open Energy Markets

Increasing domestic energy production and lifting bans on energy exports would help the U.S. economy and Ukraine. And by increasing energy supplies to the global market and diversifying global supplies, these reforms would diminish the ability of any nation, including Russia, to use energy as a weapon to impose its will in the future. For these reasons, Congress should open access to America’s energy resources and allow for the free trade of energy resources.

—Nicolas D. Loris is Herbert and Joyce Morgan Fellow in and Jack Spencer is Director of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

[1] Pavel Polityuk and Richard Balmforth, “Ukraine Signs $10 Billion Shale Gas Deal with Chevron,” Reuters, November 5, 2013, http://www.reuters.com/article/2013/11/05/us-ukraine-chevron-idUSBRE9A40ML20131105 (accessed March 11, 2014).

[2] Ben Lefebvre, “U.S. Refiners Export More Fuel Than Ever,” The Wall Street Journal, October 8, 2013, http://online.wsj.com/news/articles/SB10001424052702304441404579123604287854862 (accessed March 11, 2014).

[3] Freeport LNG, “Liquefaction FAQs,” 2013, http://www.freeportlng.com/Liquefaction_FAQs.asp#regulatory (accessed March 11, 2014).

[4] See Nicolas D. Loris, “U.S. Natural Gas Exports: Lift Restrictions and Empower the States,” Heritage Foundation Backgrounder No. 2767, February 11, 2013, http://www.heritage.org/research/reports/2013/02/us-natural-gas-exports-lift-restrictions-and-empower-the-states.

[5] See Nicolas D. Loris and Filip Jolevski, “EPA’s Climate Regulations Will Harm American Manufacturing,” Heritage Foundation Issue Brief No. 4158, March 4, 2014, http://www.heritage.org/research/reports/2014/03/epas-climate-regulations-will-harm-american-manufacturing.

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