By Tim Daiss
Hardliners in the Trump administration have been ramping up their rhetoric over Russia recently. President Trump’s hawkish chief economic adviser Larry Kudlow said in a television interview with The Hill, which aired on Monday, that the U.S. should focus more on the energy sector as a way to challenge Russia.
“We are the dominant energy power. We will be producing 15 million barrels of oil per day in a couple years. We’re passing [the] Saudis. We’re passing Russia,” Kudlow said.
“So what does that mean? [It] means we have to have infrastructure for pipelines, east, west, west, east. Get this stuff to the northeast, get this stuff to Europe and challenge Russia’s hegemony on nat gas and LNG,” he added. “This is doable. We have to really focus on the energy sector. Most of this stuff can be done privately.”
Kudlow’s comments, however, may be a bit short sighted, or at least premature, amid a growing Saudi-Russian oil production alliance. This alliance (which also includes OPEC and other non-OPEC producers, the so-called OPEC+) has effectively taken control of global oil markets, something that the Saudis gave up by default in late 2014 when it decided to open the spigots on oil production to both drive U.S. shale oil producers out of business as well as protect market share.
In the following two-year period, global oil prices plummeted amid a then troubling supply glut that the Saudis could not control. Finally, by late 2016, with budget deficits growing and threats of economic collapse, the kingdom turned to non-OPEC producers, led by Russia, to take back control of global oil markets. The strategy work and OECD oil inventory levels finally reached five-year averages by late 2017.
Though Saudi Arabia declared a victory by bringing in much needed oil revenue as global oil prices found a floor and headed north, it gave up its decades’ long ability to sway oil markets.
In light of growing Saudi-Russian oil production ties, the U.S., though it has already breached the once unimaginable 11 million barrel per day production point, is once again vulnerable to so-called foreign oil – a dismal phrase reminiscent of the 1970s onward when the country was often at the mercy of outside producers.
It should also be remembered that Russia, whose state coffers rely on oil and natural gas for much of its revenue, is also ramping up oil production. Last month, Bloomberg News reported that Russia’s oil production increased to a new post-Soviet high, fluctuating between 1.54 million and 1.55 million tons a day, driven mostly by state-run energy firm Rosneft.
Those numbers equal between 11.29 million and 11.36 million barrels per day of output, bypassing a previous record set in October 2016, just a few months before Russian agreed to participate with a Saudi-led OPEC to reign the global oil supply glut.
However, Kudlow has a more of a point on the natural gas front. With the U.S. poised to be the third largest LNG producer in terms of liquefaction capacity before the mid part of the next decade, the U.S. will challenge Russia’s own LNG ambitions to capture market share, particularly in key Asian markets. The Asia-Pacific region makes up 72 percent of global LNG demand, with that amount projected to increase to 75 percent on the back of increasing Chinese demand.
U.S. LNG exports will also make inroads into Russia’s natural gas monopoly in Europe as Germany and other EU members concede to Trump’s insistence over more gas imports to appease the president over trade differences. Yet, Russian piped gas will for the foreseeable future remain at a cost advantage of LNG imports to the continent, both U.S. LNG imports, Qatari imports and others.
American LNG is still expensive compared to Russian piped gas. Using a Henry Hub gas price of $2.85/MMBtu as a base, Russian gas giant Gazprom recently estimated that adding processing and transportation costs, the price of U.S.-sourced LNG in Europe would reach $6/MMBtu or higher – a steep markup.
Henry Hub gas prices are currently trading at $3.336. Over the last 52-week period U.S. gas has traded between $2.64/MMBtu and $3.82/MMBtu. Russian gas sells for around $5/MMBtu in European markets and could even trade at lower prices in the future as Gazprom removes the commodity’s oil price indexation.