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An Unwelcome Note on European Natural Gas

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
June 12th, 2014

At the bottom of page 79 in my book "The Political Economy of Natural Gas (1987), you will find the following warning: "There is also the possibility that an outright rejection of Soviet (= Russian") gas on political grounds would mean that trade that might be carried out with Western Europe would then take place between the Soviets (Russians) and the countries of East Asia".

Not a possibility, Fred, but a certainty - and incidentally, congratulations on your foresight. Moreover, a few pages earlier, I began a discussion of what some Soviet official called "the deal of the century". As in my talks at Cambridge and the Australian National University, I emphasized that the so-called 'intolerable level of Western European energy dependence actually ran in the other direction": to be explicit, Western Europe was in the drivers' seat, because for them the purchase of that gas was a welcome convenience, while Russia was desperate for the money they received from selling it, due to their being without affluent customers in other parts of the world.

As several gentlemen in business suits assured me after my long and brilliant Cambridge lecture, "if the issue is natural gas, the Soviets play by Capitalistic rules", and they did not lower their voices when providing me with some examples to use in future lectures.

When it comes to the organization and publication of information about energy economics, nothing beats the site 321 Energy. However since they do not have what is called an 'agenda', occasionally an oddball opinion turns up among the wealth of informative articles they reproduce. One of these off-the-wall contributions carried news of a war between the U.S. and Russia - a trade war - in which American liquefied natural gas (LNG) locked horns (or some other part of the anatomy) with Russian pipeline gas over a bounty of more than ten billion dollars a year, with China on the buy side of this arrangement.

I suppose that if the Russians were not well along in their pipeline construction toward China, and the papers for another 'deal of the century' between Russia and China signed, sealed and delivered, there might be some sort of logic in the U.S. accepting a (hypothetical) challenge on the energy field of honor, but in the circumstances, neither talking or thinking about a 'rumble' between these two countries made the slightest bit of economic sense. And if the numbers that we sometimes see about the depreciation of shale natural gas deposits are only approximately correct, then for the U.S. to 'gear up' for a brawl with Russia is goofy. (And here I must admit that the depletion 'rates' that I constantly see for both shale oil and gas are such that I am afraid to mention them to my students - though not to my colleagues of course, because most of them neither know about nor are interested in topics like depreciation rates, regardless of its importance in both micro and macro economic theory.)

Thus we come to what I call the bottom line, which is that the natural gas that should go to Europe, as Lord Howell (of the UK made clear), will now go to East Asia (i.e. China, and probably later also Japan).

To replace this gas, Chancellor Merkel is apparently in the process of allowing (and perhaps even encouraging) fracking to take place in her country (Germany). This could undoubtedly be called the correct decision were it not for the fact that the CEO of Exxon-Mobile has publicly stated that the "clays" in Europe are not very productive where fracking is concerned. Just as important, Mr CEO gave thumbs down on some shale deposits in the U.S., and I am sure that even Madame Merkel has been informed of the disappointments often experienced by enthusiastic 'frackers' in countries like Russia and China, where reserves are the largest in the world.

Accordingly, what she and her foot soldiers may not be aware of is that in dumping nuclear, and joining in the bad-mouthing of Mr Putin's natural gas, Madame Merkel has done exactly what folks like Nathan Detroit suggested not doing: trading a certainty (nuclear and Russian gas) for an uncertainty (comparatively profitable fracking), especially when the odds are heavily against your coming out on the sunny side of this exchange. The point is that Russian natural gas and the next generation of nuclear were/are the way ahead for the good people of Northern Europe, and without it things like those long vacations on the beaches of Southern Europe will progressively grow more expensive.

REFERENCES

Banks, Ferdinand E. (2014). Energy and Economic Theory. Singapore, London and New York: World Scientific.

______. (1987). The Political Economy of Natural Gas. London, New York and Sydney. Croom Helm.


Professor Ferdinand E. Banks
ferdinand.banks@telia.com
June 12th, 2014




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