Russian Pipeline

Neither U.S. Candidate Bodes Well for Russia’s Energy Market

November 02, 2020
Tatiana Mitrova
This article was originally published by Carnegie Moscow Center.

The energy sector was an early hostage of geopolitical friction between the United States and Russia, and the situation has only gotten worse in recent years. The two countries may be the biggest traders on the global energy market, but bilateral trade in resources between them is practically non-existent. Joint energy projects are few and far between, not only on their own territory, but that of third parties too. Neither Russia nor the United States has run up against any serious threat to their national energy security: both countries are self-sufficient. Yet energy remains a constant source of divisions in bilateral relations. 

For decades, the two countries have been immersed in both overt and covert conflicts over access to energy technology (sanctions relating to this have been a regular feature for half a century), over the European gas market (most recently over Nord Stream 2), over competition between Russian gas and U.S. liquified natural gas (LNG), in the Caspian region (over the development of pipelines bypassing Russia), and in the Arctic (over control of Arctic resources).  

There have been periods of relative thaw, when the two sides have tried to find shared interests, and even undertaken joint projects, but most of them ended in disappointment. 

Before 2014, conflict in the energy sector was limited to symbolic gestures, rhetoric, and attempts to use diplomacy to gain influence in third-party countries. That changed when Russia was slapped with sanctions affecting its oil and gas industry over its role in the Ukraine crisis, just as there was a boom in shale gas and oil in the United States. That boom drastically reduced U.S. dependence on hydrocarbon imports, and even turned the United States into a net exporter in some areas, such as LNG, which instantly threw it into a battle with Russia for the biggest markets: Europe and Asia.

The United States overtook Russia in terms of annual gas production back in 2011, and political pressure began to mount on Russian gas exports as countries sought to reduce their dependency on Russian imports, and opposition to Russian pipeline projects grew. In 2015, the United States also started producing more oil than Russia, thanks to its shale projects. U.S. producers rapidly increased their output, which led to a surplus and, consequently, a slump in global prices. 

The drop in oil and gas prices in 2015–2016 prompted Russia to reassess its relationship with OPEC (the Organization of the Petroleum Exporting Countries). For the first time, Russia cooperated with the cartel to stabilize the market (and essentially to mitigate the consequences of uncontrolled growth in U.S. production). 

The two candidates in the upcoming U.S. presidential election have fundamentally opposite views on developing the country’s energy sector, but whoever wins, it doesn’t bode well for Russia’s oil and gas industry—only for different reasons.

Donald Trump operates within the traditional paradigm of the Republican Party, promising to lower taxes and support traditional heavy industry, such as metallurgy, machine-building, and coal, oil, and gas mining.

Of course, Trump hasn’t managed to fulfill all of his campaign promises—employment in coal mining and metallurgy continues to decline—but the U.S. withdrawal from the Paris Agreement on climate change, extremely lax environmental regulation, and sanctions against Iranian and Venezuelan oil and the Nord Stream 2 pipeline, combined with pressure on the OPEC+ group of oil-producing nations can certainly be seen as promoting the interests of the U.S. oil and gas industry. 

Trump’s support for the U.S. oil industry and increase in oil production by 4 million barrels a day has led to a noticeable loss of oil and gas revenues for Russia. If Trump stays on for a second term, he has promised to maintain support for fossil fuels, all of which compete with Russian exports, as well as extremely loose regulation of the oil and gas sector, and the swift issuing of licenses to develop the Arctic shelf, which Russian producers are unlikely to be pleased about. 

The Democratic candidate Joe Biden holds entirely opposing views on the future of U.S. energy. He has called for a return to the Paris Agreement and the Green New Deal, with a gradual move over from the oil industry to renewable energy sources. His plans to make the U.S. energy sector carbon free by 2035 and to make the country carbon neutral by 2050 are reminiscent of EU climate policy, which has already caused headaches for the Russian establishment. 

Biden has promised to invest $2 trillion over the next four years to clean up U.S. energy, including on electric vehicle charging infrastructure and “newer American vehicles built from materials and parts sourced in the United States.” He also plans to increase taxes and environmental regulations for the oil and gas industry by abolishing federal subsidies, limiting the issuing of new development licenses, and canceling the construction of new pipelines. Investment in low-carbon energy technologies, which has been notably cut by Trump, will increase, and new jobs will be created in green energy. 

For Russian oil producers, that could mean a short breather and the disappearance from the market of some U.S. shale oil and gas. But in the longer term, a green swing by the United States—one of the biggest energy consumers in the world and a trendsetter in car manufacturing—will inevitably lead to slowing global demand for oil, as well as a rethink of energy strategies by other countries. 

The resolve of key market players (in addition to the United States and the EU, China, Japan, and South Korea have also pledged to be carbon neutral by 2060) will become a major factor both for consumers and investors, as well as equipment manufacturers. So, in the event of a Biden victory, pressure on Russia over climate change will increase.

There will also be many secondary effects from the outcome of the U.S. election. The differences in the two candidates’ approaches to Iran, Saudi Arabia, China and the EU will inevitably affect energy markets.

Another approach to the problem would, of course, be to diversify the Russian economy to make it less dependent on external markets. But there is no such resolve on Russia’s agenda. It remains only to accept the further deterioration of relations in the energy sector as the new and inevitable normal.

Author

Tatiana Mitrova

Tatiana Mitrova is the director of the SKOLKOVO Energy Centre.

 Photo from Wikimedia Commons, shared under a Creative Commons Attribution-Share Alike 3.0 Unported license.