The environmental lobby acts as if green energy is a free lunch — but now, reality is about to set in. Chinese President Xi Jinping acknowledged last week that China — the world’s largest polluter — is unlikely to meet its environmental targets. The Chinese economy is slowing, and Mr. Xi noted that it was important to ensure adequate supplies of food, materials and energy to provide a normal life for the people — even if it required more reliance on fossil fuels, including oil and gas.
British policymakers have been as short-sighted as those in the Biden administration. The U.K. had set as a goal to obtain most of their energy from green sources, such as wind and solar. This has not worked out well. The new green-energy projects have been slow to come on-line and have underperformed when implemented.
For example, there has been a dearth of wind in the North Sea in recent months. The U.K. was an oil-and-gas exporter during the Thatcher years, but little capacity has been brought on-line to replace the older North Sea wells. Massive natural gas deposits were found in the north of England but have not been exploited because it requires fracking — a no-no to the “know-nothing British environmental lobby.” As a result, the British are increasingly dependent on Russian gas and LNG imports from Qatar, Nigeria and particularly the U.S.
Overall, Europeans are dependent on Russia for about 40% of their gas — which can be shut off in a major Ukraine-Russian war. Australian LNG exporters have the ability to replace some of the Russian gas — and said they are willing to do, but such a switch will take time.
The Trump administration had the explicit goal to make America energy independent — which they accomplished. By the end of the Trump administration, more oil was being produced domestically than the U.S. was consuming for the first time in 50 years. Drilling restrictions on federal lands were lifted — Alaska being particularly important. Regulatory restrictions on oil and gas production that did not meet reasonable cost-benefit tests were abolished, and new pipelines were permitted.
The Biden administration immediately reversed course by killing pipelines, imposing many new regulations, reinstalling regulations that had previously been abolished, and removing previously approved drilling permits.
So, once again, the U.S. became dependent on foreign oil producers — not all of them friendly to the states. Banks and other financial institutions that were lenders to the oil industry were told by folks in Washington that they would be “looked at” very carefully if they continued to service the oil industry. The oil companies got the hint and reduced their capital spending. The result was less production.
A new Russian invasion of Ukraine will greatly increase oil and gas prices, likely sending the whole world into a recession. Russia has indicated it would cut off certain supplies of natural gas as a weapon against those who try to help Ukraine. Like all commodities, gas is priced at the margin, so any substantial reduction of supply anyplace will affect prices everyplace. Coupled with the ongoing inflation, an increase in gas prices will further erode consumer purchasing power, making almost everyone poorer. Russian consumers will not escape because increased sanctions will affect prices of many goods in Russia.
Natural gas is necessary for the production of nitrogenous fertilizers, urea and ammonium nitrate. Fertilizer prices have already soared, and further supply shortages and price increases mean that farmers will be cutting their use, thus substantially reducing crop yields, which in turn will cause food prices to keep rising. Such a turn of events will be catastrophic for much of the world’s poor, leading to more hunger and perhaps even famine.
Nitrogen fertilizers are also used in explosives, which causes the U.S. and other countries to embargo shipments to hostile states and regions — many of them containing much of the world’s poorest — who are likely to suffer even greater hunger.
Russian President Vladimir Putin is rightly viewed as being very intelligent and an able tactician. Over the years, Mr. Putin has also revealed that he has little interest in economics and seems to have a blind spot when it comes to the economic consequences of his actions.
Russia, despite its geographical size, enormous raw materials and technically well-educated population, continues to have a narrow industrial and export base. It produces and sells huge quantities of oil and gas, wood products, metals and weapons, but relies, unlike China, on much of the rest of world for a broad array of consumer and industrial goods.
At the end of the Cold War, China decided to let the free market produce most manufactured items — and so now it produces most everything. Russia had a bigger economy than China three decades ago, but never released the entrepreneurial energies of its people and insisted on too much state control, regulation and state ownership — so its economy, by any measure, is now far smaller than China’s. Mr. Putin learned that communism does not work, but he has yet to understand the fatal flaws in the Russian fascist economic model.
A Russian invasion of Ukraine will cause great misery, not only in Ukraine, but also in Europe and much of the rest of the world — and particularly in Russia, where the second-order effects of a war seem not to be well understood.
• Richard W. Rahn is chairman of the Institute for Global Economic Growth and MCon LLC.
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