In the May issue of the Wiley journal Climate and Energy, NERA Managing Director Dr. Jeff D. Makholm spotlights Russia’s manipulation of its natural gas exports to the European Union (EU) in advance of its invasion of Ukraine. The EU’s natural gas prices spiked wildly as a result. The potential of Russia to hold hostage critical winter gas supplies to Europe’s millions of natural gas consumers was not unforeseen. Dr. Makholm cites a 2018 law journal paper he co-authored with a Ukrainian law professor (now in a small Ukrainian town on the Sea of Azov under Russian occupation) that documented a strong pattern of such manipulation that should have stood as a warning to the EU—and indeed was a concern of US administrations as far back as the early 1980s.
Dr. Makholm looks back at the administration of President Ronald Reagan, which imposed sanctions on what would become the Trans-Siberian natural gas pipeline crossing modern-day Ukraine. Reagan’s sanctions barred American companies, foreign affiliates, and independent companies under license to American companies from working on that pipeline. It was one of the most visible issues upon which Reagan and the UK’s Margaret Thatcher (and especially French President François Mitterrand) disagreed. Those who pushed for sanctions in the Reagan Administration in 1982 feared that Western Europe could be exposed to undue Soviet economic pressure once millions of natural gas consumers in those countries came to rely on Russian gas to heat homes and businesses. It took another 40 years, but the risks the Reagan administration feared have played out in 2022 in the lead-up to Russia’s brutal invasion of Ukraine.
For context, Dr. Makholm examines the geographical and political hurdles that a competitive natural gas supply industry must overcome. What he calls “the most difficult and troublesome of commodities,” which requires pipelines to ship any distance overland, gives the holders of those pipelines (or the lands they cross) unique powers to bar entry in natural gas markets (as Russia has evidently exercised). Various US institutions serve effectively to constrain such market power, and as a result, US natural gas markets have become a source of highly beneficial competition to US energy consumers (saving them trillions of dollars compared to what EU consumers have paid over the last dozen years). Without the same underlying institutions needed to overcome such geographical and political entry barriers, the EU never had the ability to foster a US-style natural gas market—even though it aspired to such a decentralized, competitive market. Dr. Makholm concludes that Europe needs quickly to shift the geography of its gas supply away from Russia—either to the west or southeast (bypassing Russia). For Europe, secure and reasonably affordable gas has become a short-term political exigency, not a market-building project or a long-term green energy initiative. Such pipeline routes and storage sites as will be needed to protect European supply security—in winter 2022–23 and beyond—are political projects.
Makholm, Jeff D. (May, 2022). “The 2021–22 European Gas Disaster: Was Reagan Right, and Thatcher Wrong?,” Climate and Energy, 38/10, ©2022 Wiley Periodicals, Inc., a Wiley Company