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Tuesday, March 1, 2022
US may have the biggest piece on the geopolitical chess board

There are multiple takeaways from a particularly intense week that saw Russia’s incursion into Ukraine prompt Western economies — in a rare and historic show of force and unity — put the financial squeeze on Moscow. But one in particular stands out.

The United States, which for years took the fruit of its shale revolution for granted, has mostly bypassed a golden opportunity to use its bountiful energy resources as a potent geopolitical weapon. At the risk of oversimplifying, Europe needs oil and gas, which it imports from Russia — and the U.S. has both in spades.

Sanctions have effectively transformed Russia into a pariah state — turning the gaze of an increasingly isolated Vladimir Putin eastward. There’s never been a more opportune time for America to advance an idea that’s been mooted since the last time Moscow used its energy supplies to threaten Continental Europe (a subject I once covered as an energy reporter), which gets nearly 40% of its natural gas and 25% of its oil from Russia, according to ING data.

Eurasia Group estimates that “retaliatory Russian measures to block oil and gas exports to Europe are a 30% probability (especially if the conflict drags out and US/EU punitive measures are expanded), although the financial and commercial repercussions for Russia would be severe,” according to a recent analysis.

“A Russian move would accelerate efforts by other producers to fill the oil and gas gaps, but reduced levels of global spare capacity will limit the ability of other producers to compensate fully for any lost Russian volumes,” the firm added.

Yet all’s fair in love and geopolitics, and the latter is increasingly defined by a global economy with implacable demand for fossil fuels.

Enter the fracking-happy U.S., which after a pandemic-inspired production crash has seen oil output rebound sharply to over 11 million barrels per day, according to the Energy Information Administration, which also estimates natural gas stocks will hit a record in 2022. Domestic production flourished under Presidents Obama and Trump, and has continued to climb in spite of President Joe Biden's now stalled green agenda, which Yahoo Finance's Rick Newman highlighted on Monday.

"The U.S. has learned some lessons ... about not having sufficient energy diversity and being overly reliant on nations that don't always have our best interest at heart," PSEG CEO Ralph Izzo told Yahoo Finance Live on Monday.

Despite its polarized politics, the world’s largest economy — also the globe’s biggest oil producer — sits in the enviable position of having the most stable environment to produce and export supplies. In fact, a number of observers argue that the time to ensure stable and reliable energy supplies is long overdue, even if the conversation postpones the day of reckoning on climate change.

“I think people just forgot about energy security,” energy expert Daniel Yergin told The New York Times’ Andrew Ross Sorkin last week.

“As the U.S. went from importing 60% of our oil to becoming an exporter, we then didn’t think about it anymore,” Yergin added. “Oil demand is still increasing and is likely to increase at least for the rest of this decade and perhaps into early next decade.”

What that means is that Europe will need to stop entertaining fanciful ideas of using green energy to power its industrialized economy, and other countries will have to take a hard look at their own strategies for energy independence.

That includes making room for nuclear power. For years, a small but vocal contingent of conservationists have called on the U.S. to breathe new life into its moribund atomic power sector, partly as a strategic counter to Russia’s prolific leveraging of nuclear technology with other nations.

Meanwhile, surging oil and gas prices are undermining the world’s transition away from fossil fuels, Yahoo Finance’s Akiko Fujita wrote recently, driving a wedge ever further between an already divided policymaking establishment. A dire report from the U.N.-backed Intergovernmental Panel on Climate Change released on Monday underscored the implications for the environment.

To be sure, renewables have their place, with the rapid adoption of electric vehicles playing an important role. Yet demand for fossil fuels isn’t going anywhere, and requires countries to make realistic assessments about how to insulate energy supplies from the vagaries of an unpredictable world.

In other words, "drill, baby, drill" — and keep on drilling.

By Javier E. David, editor at Yahoo Finance.