Diary

How the Economics of Oil Could Win in the Ukraine

REMEMBER that diplomacy without power is feeble, and power without diplomacy is destructive and blind.

REMEMBER that no nation’s power is without limits, and hence that its policies must respect the power and interest of others.

(Hans J. Morgenthau, In Defense of the National Interest, Alfred A. Knopf, Inc. NY 1951, p 242.)

 

.Realpolitik is often thought of as the skillful use of the diplomatic and military assets of a country versus those of another country or countries, as skillfully used by the leaders thereof, in search of perceived national interests or other advantage. However, as we have seen in the past and are currently seeing with regard to the Ukraine and Crimea there are other forms of national power, principally economic, that can be brought to bear if they are cultivated in advance. Just as it is necessary to have military forces, trained, equipped and modernized in advance to give teeth to your diplomacy, economic power must be honed and cultivated in areas that have strategic importance if it is to provide weight to your position.

 

When a country has a great capacity for production of an economic good that is in demand around the world, that country also has a weapon that can be effectively used to deter certain kinds of conduct by others. For example, Russia is a great producer of oil and natural gas. The Ukraine is crisscrossed by pipe lines taking Russian natural gas to most of the countries of eastern and western Europe. The threat of turning off the gas is a economic weapon in the hands of Vladimir Putin or any other leader of Russia.

 

Now the USA is also a producer of oil and natural gas. In recent months, the USA has become the world leader in the production of gas and soon also in oil, in spite of the Obama Administration’s failure to open federal lands and off shore areas to drilling and failure to approve the pipe line from Canada. If we can produce this much oil and gas with the resistance of the government, think of what we could have produced with the support of the government. Think of what a weapon Mr. Obama would then have had in dealing with Mr. Putin. “Vlad, you will get out of Ukraine and Crimea tomorrow or I will cut the world price of oil and natural gas in half and ruin the Russian economy.”

 

Or, Mr. Obama could have just supplied natural gas to the countries of Europe that now get it from Russia. This would also have dampened the Russian economy and reduced Russian influence in Europe. But not even one liquid natural gas terminal was (or is currently) ready to export natural gas.

 

Alas, Mr. Obama does not have this weapon honed and ready. His administration has fought having this weapon tooth and nail for as long as he has been President.   Moreover, at the same time the Obama Administration has been using up and damping down the military establishment. In his latest budget proposal, Mr Obama further cuts the military and thereby further limits the national power to back up his diplomacy or that of the Presidents that will follow him.

 

Fortunately, Mr. Obama may be temporarily saved by the slowing economic growth in the oil consuming West and increasing oil production from Saudi Arabia. It has been suggested that the Saudi’s are trying to drive down the world price of oil to discourage further American discovery and production. Reduced demand and increasing supply for oil and its derivatives has started to drive down the world price of oil even without the US capacity to export more oil and gas. This is already hurting the Russian economy (while helping the US economy) and may be creating a leverage point in the Ukraine. There may be a window of opportunity for the USA to develop even more strength in oil and gas to drive down the current price of oil even more and project future strength in this area. By opening all possible areas to drilling and quickly approving the Keystone XL Pipeline, it will be apparent to the world that the supply of oil will grow in the future. And this could supply the leverage to push Putin out of the Ukraine.

 

There is precedent for dealing with the Russians using economic strength. President Ronald Reagan, with Saudi cooperation led the country in simultaneously building up the USA’s military power and drastically lowering the world price of oil to bankrupt the Soviet Union as it tried to keep pace with its socialist economy and dependence on oil exports.

 

We still live in a dangerous world. We may have won the Cold War with the Soviet Union, but the demise of the Soviet Union only unleashed a lot more actors on the world stage and some of their interests are not amicable to those of their neighbors and/or to us and our allies.  Russia under Vladimir Putin would like to reconstitute the old Russian Empire (which, by the way, would look a lot like the Soviet Union before its demise).   He has already taken part of Georgia and is now eyeing parts of the Ukraine. Without robust military and economic power, it might be difficult for the USA to oppose this or to enlist the aid of our Western European “friends.” If we cannot adequately oppose Russian expansionism, where does that leave the former Soviet satellite countries from the Ukraine to the Baltic?

 

Mr. Obama has not been paying attention to national power on his watch. He has neglected economic growth in favor of stimuli, social programs and failed subsidies of favored companies. He has failed to encourage production of oil and gas on public lands and off shore. He has scrapped plans for the missile defense complex in Europe. He has permitted erosion of capability of the military forces of the USA and he plans to further reduce this element of national power. Meanwhile Mr. Putin still holds most of the cards in Crimea and indeed in the Ukraine as a whole and maybe with the former Soviet Satellites in Eastern Europe and maybe even in the gas using parts of Western Europe. Mr. Obama now has US national power provided by the economics of oil to use against Mr. Putin’s expansionism. Will he use it or continue to let Mr. Putin gain from his lesser capabilities?

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Jeff Scribner is a retired Army officer and president of ASI Enterprises, Inc., an investment bank serving small- and medium-sized businesses. He can be reached at [email protected]

 

Copyright © 2015 by Jeffrey L. Scribner