Are You Willing to Pay the Price for Diplomacy?

The word “geopolitics” sounds like a punk band from the 1980s… as if there should be a thrashing sound from guitars and stupid hair whenever the word is used.

Instead, it’s a reference to the political chess game played out on the world stage, with everyone vying for geographic dominance, or at least advantage.

The problem is, when one state or group wins, others lose.

While most people on the street don’t worry too much about the goings-on of diplomats and ambassadors, they certainly pay the price for how the cards fall… we all do.

The current upheaval in Eastern Europe, where the Russians have sent unmarked troops into Ukraine and are calling them “peace keepers,” is definitely going to hit us all in the pocketbook.

This eventuality is something I pointed out to Boom & Bust readers last fall. It’s all about energy…

In the game of world domination, everyone is looking for a way to punish or neutralize the Russians for assuming de facto control of the Crimean region of Ukraine.

Sure, it’s filled with Russian-speaking people who self-identify as Russian, but that doesn’t matter. The region is officially part of Ukraine.

The problem is that the people closest to the situation, the Germans and other European nations, have some skin in the game. Everyone wants Putin to take his tanks and go home, but no one wants to pay the price for forcing him out.

The cost would not be exacted in military terms. It would be charged by the million British Thermal Unit, or mBtu.

Countries that import natural gas from Russia and oppose Putin’s actions would certainly be facing a much higher gas bill in the future. No one wants that. So instead, they have a different plan…

Shift the cost onto Americans.

Our fearless and clueless leaders have decided that we should open the spigots of our newfound gas reserves and start sending every last mBtu to the Europeans or anyone else threatened with a Russian price increase.

While the goal of natural-gas providers has always been to export, congressional and business leaders want to expedite the process to de-fang the Russian Bear’s economic threats.

This is seen as a win-win because American companies will realize a windfall of new business while the Russians will lose a major trump card — the ability to foist price increases on captive natural-gas clients.

There’s only one small part of this calculation not being discussed: What happens to the price of natural gas?

Unlike oil, natural gas is not priced on a world market. Instead, it’s priced by location. The reason is that natural gas is very expensive to transport overseas. To do so, it must first be liquefied. Plants that liquefy natural gas are expensive to build and take years to bring online. Moving gas by pipeline is cheaper, but not always feasible.

So prices vary around the world, depending on where gas is produced and how it’s transported.

Today, prices in Europe are about $11.30 per mBtu. The price in Japan is $16.63 per mBtu. In the U.S., we pay $4.60 per mBtu.

Do you see a difference here?

The U.S. natural-gas expansion is only a few years old, and we don’t export the fuel beyond our landlocked neighbors because we don’t have a single liquefaction plant online yet.

But we will soon.

In fact, three are already approved, and one should be operational next year. When we begin liquefying and shipping gas overseas, gas producers will choose to sell their product to the highest bidder.

Clearly they won’t be able put all their product on ships, but every single mBtu that goes overseas will cause the price here at home to equalize a little bit higher.

Will we eventually pay $11 or $20 per mBtu?

Probably not, but our price could easily move up to $8 — almost double today’s rate — and stay there.

Think about what this would do to the cost of electricity being generated by all of those newly built power plants that burn so much more efficiently than coal. Or even the monthly heating bill when we have another cold winter like this one. I can see dollar bills going up in (very clean) smoke.

And to think that our illustrious leaders are working to bring this on even faster, in the name of taming the Russians.

For consumers that watch their pennies, they should figure out how much of their power bill is devoted to natural gas, either directly or through electricity generation. It’s entirely possible this is a chess game you’re about to lose, and you didn’t even know you were playing.


Rodney

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Categories: Foreign Markets

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.