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Anopinion on Liquified Natural Gas

Summary:
This might be a very long confused post or might be a series of confused posts. I am trying to think about what to do about Putin (assuming he isn’t overthrown in a palace coup). My first thought was that this is not time for increased military spending . The Russian military turns out to be much less capable than we thought. There is no reason to guess that the Chinese, North Korean, Iranian, or other potential trouble maker militaries are more capable than we thought. I think a reasonable assessment of overall world wide military threats has declined dramatically. I also think that NATO military spending was higher than optimal given information available in 2021. I had a rather painful Twitter debate with Noah Smith on this topic. I

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This might be a very long confused post or might be a series of confused posts. I am trying to think about what to do about Putin (assuming he isn’t overthrown in a palace coup).

My first thought was that this is not time for increased military spending . The Russian military turns out to be much less capable than we thought. There is no reason to guess that the Chinese, North Korean, Iranian, or other potential trouble maker militaries are more capable than we thought. I think a reasonable assessment of overall world wide military threats has declined dramatically. I also think that NATO military spending was higher than optimal given information available in 2021.

I had a rather painful Twitter debate with Noah Smith on this topic. I read his latest substack with some anxiety. Oddly I found he was arguing exactly for what I believe (and was trying to argue here (link above) and on Twitter). Anyway, he writes better than I and also does a lot of research, and so is highly expert by the time he posts. I am not sure that “The long economic war against Russia: A plan” is available to non subscribers. In any case, I will try to summarize it when discussing (as well as fair using a bit). Noah argues that should send Ukraine the weapons they request including airplanes then presents his economic war plan

“I see four basic things the West can do:

  1. Export controls
  2. Weaning Europe off of Russian gas
  3. Draining Russia of smart and competent people
  4. Reducing oil prices by switching to electric vehicles”

On point 1, Noah argues against broad sanctions which will hurt Russians in general. He notes that they haven’t worked against Cuba etc. Rather he also notes (as I stressed in our Twitter debate) that Russian arms manufacturing is dependent on components imported from potential military adversaries. Russia is not, at the moment, actually making any tanks. Is it really possible that a wannabe great power spent large amounts of money developing and building weapons which it can’t make or even maintain unless it has good relations with its perceived adversaries ? Well it happened so it must be possible. Good thing that US manufacturing doesn’t depend on imports from China eh.

On point 3 Noah notes the extreme brain drain. Here there is a strategic reason to offer young educated Russians green cards. It is also liberal and humane, but the stragetic reason adds to the already very strong case (hey I didn’t think of this but they are White, so even Donald Trump and Stephen Miller should be on board). No brainer at the level of even Trump can understand no-brainerness.

On point 4. There has long been an absolutely clear strategic rationale for ending dependence on fossile fuels. That dependence is the West’s number one strategic vulnerability. The only other threat which might compete is global warming. The blindingly obvious has become blindinglier obviouser this year.

I would just add 2 things. FIrst, switch to electric home heating too. One way to wean Europe off of Russian Natural gas is to replace gas furnaces (like the one I own) with heat pumps (like the 0 I own). Retrofiting a house is more of a hassle even than buying a new car, but I think it has to be part of the solution.

As a matter of public policy, Western European states which do not want their country to be dependent on Putin’s good will should, as a matter of public policy, pay for the heat pumps and provide the electricity. I think this is a better investment than buying F-35s (partly as I think almost all investments are better than buying F-35s).

Similarly, as Noah Notes, subsidies for electic vehicles are justified on national security grounds, only wimps (like me) who are willing to bow to Putin and Muhamad Bin Salman drive gasoline powered cars. Real patriotic red blooded macho men drive electric vehicles. It’s better to recharge on your feet, than pump gas on your knees. This can’t be a joke, because it’s obviously true (OK yeah it’s also a joke, but it is true).

That leaves point 2. Aside from heat pumps, the weaning involves liquified natural gas. I argued that Germany should invest in liquified natural gas terminals not weapons. Of course they are as noted by Stanley Reed in the New York Times.

This does not necessarily solve the problem. They also need the liquified natural gas to unload, and the huge increase in demand is causing a spike in prices. To me the key and frustrating part of the article is

“Cheniere Energy is moving ahead with a large expansion of its export facility at Corpus Christi, Texas. Qatar also says it is working on adding an enormous slug of liquefied natural gas in the next five years.

Developers, though, will be wary of whether the current boom in Europe might fade well before the expiration of the new L.N.G. projects, which are generally expected to operate for 20 years or more. And European leaders insist they still view gas as a temporary fix before renewable energy sources like wind and solar and hydrogen take over.”

The solution is for a state to pay for 20 years of LNG in advance on the condition that the plants be built. There is no reason why Cheniere should bear the risk. The cost of, maybe, buying gas for much more than the market price is small compared to the benefit. In general the US Federal Government should bear risk, it can make huge expected profits selling insurance and definitely should.

But now there is a compelling national security reason to increase LNG capacity. I must understand why Congress is willing to spend so much on weapons and definitely won’t accept my proposal. I think one reason is that losing money when you *might* have made a profit looks like an error. Spending money on the military when no one imagines profit (well no one but the pirate Donald Trump) does not look like an error. Also, there is great reluctance to compete with private agents (like commodity speculators) because they get angry. I am saying that market incentives are not socially optimal, and that looks like socialism. I am trying to guarantee profits to a business (explicitly) and that looks unfair and corrupt. So I guess I understand, but I don’t like it.

Here my conclusion (as always) is, for example when you think only about foreign military threats and preparing for war, there are lots of better ways to spend money than to buy F-35s.

Robert Waldmann
Robert J. Waldmann is a Professor of Economics at Univeristy of Rome “Tor Vergata” and received his PhD in Economics from Harvard University. Robert runs his personal blog and is an active contributor to Angrybear.

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