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White House alarm rises over Europe as Putin threatens energy supply

Biden aides have redoubled efforts to increase natural gas exports across the Atlantic but see few obvious solutions

President Biden delivers remarks during an energy and climate forum in Washington in June. White House aides are concerned about Europe's energy supply this winter. (Demetrius Freeman/The Washington Post)

White House officials are growing increasingly alarmed about Europe’s energy crisis and Russian President Vladimir Putin’s threats to force a bleak winter on the continent.

Seeking to punish Russia for the invasion of Ukraine and force a retreat, Western allies have moved to set a cap on what buyers pay for Russian oil. Putin last week said Russia would retaliate by cutting off gas and oil shipments, which could devastate Europe’s economy and hurt the United States by sending global energy prices soaring.

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U.S. officials believe Putin’s bellicose rhetoric is at least partially a bluff, as Russia needs revenue from energy exports to finance its war effort, even at lower prices. But aides to President Biden have in recent days reviewed their efforts to export liquefied natural gas to Europe, aiming to see if there’s any way for American producers to help. (Nearly 40 percent of the natural gas Europe uses for heat and electricity came from Russia before the war started.) And while White House aides do not believe a recession in Europe would necessarily cause one here, a complete shutdown of Russian oil exports would seriously harm the U.S. economy, according to economists, energy analysts and internal White House assessments.

The escalating pressure from Russia could put new strains on a U.S.-Europe alliance that has proved surprisingly resilient since the start of the war, while also threatening to cloud the Biden administration’s recent economic victories ahead of the midterm elections this fall.

Some economists and Wall Street analysts have said inflation may be peaking after an encouraging federal report for July. Administration aides, though, are worried that the situation could get worse again quickly if Putin cuts off oil and gas shipments, said two White House officials, speaking on the condition of anonymity because they were not authorized to speak on the record.

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The outlook in Europe has deteriorated with surprising speed in recent weeks. The European Central Bank raised interest rates by 0.75 points this past week, with officials saying they expected a “substantial slowdown” there this fall. Some European governments are resisting attempts to set a price cap on natural gas for fear of provoking Putin, and it’s not clear that the international economic sanctions on Russia could withstand a truly dire energy crisis.

Publicly, Biden administration officials are playing up good economic news at home. Biden and Treasury Secretary Janet L. Yellen embarked on a victory tour last week to tout a string of legislative victories — particularly the Inflation Reduction Act, passed with Democratic votes only — aimed at large-scale changes in the U.S. economy. Their sense of optimism has been buoyed by a dozen consecutive weeks of falling gas prices. Jobless claims have also come down in recent weeks, allaying fears of an imminent recession, and voter anger over inflation appears to be at least somewhat calming, helping Democrats’ poll numbers improve.

White House officials — and most economists — believe the growing likelihood of a recession in Europe is unlikely to change under the current trajectory. One senior administration official, who spoke on the condition of anonymity to reflect internal assessments, said the Treasury Department and Council of Economic Advisers estimate that the impact on the U.S. from a European recession would probably be “modest and manageable.” Trade with Europe accounts for less than 1 percent of U.S. gross domestic product, and many economists agree a decline in European consumer demand probably would not substantially affect U.S. firms. America also produces enough of its own natural gas not to be significantly affected by Russia restricting its flow into Europe.

If Russia keeps selling oil to world markets and only reduces gas exports to Europe, the effect on the U.S. economy probably would be minimal. In fact, that could help U.S. firms that produce natural gas. It could also sap global demand, further alleviating domestic price pressures.

“If Europe goes into recession, there’s obviously less demand for a wide range of products,” said Dean Baker, an economist and co-founder of the Center for Economic and Policy Research, a liberal think tank. “We’re in such a perverse situation here it may actually be positive.”

U.S. options for helping Europe through its energy crunch may be limited. Already, the Biden administration has overseen a massive expansion in how much liquefied natural gas is shipped from U.S. frackers to Europe, with roughly 70 percent of U.S. export gas now going to Europe, according to administration assessments. The United States is already surpassing its goal of transporting an additional 15 billion cubic meters of natural gas to Europe this year. Since March, U.S. firms have delivered 30 billion cubic meters to Europe — more than twice the amount over the same period of time last year, administration officials said.

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Administration aides have brainstormed ways in recent days to increase that even more, as Europe considers draconian measures to cope with the lack of energy. (The administration officials emphasized that the White House has for months been seeking any possible way to increase natural gas exports to Europe.) But there appears to be no quick way to increase the capacity of terminals that help ship gas across the Atlantic.

“We are, of course, very concerned about the entire global outlook,” Yellen told reporters on Thursday while traveling to Dearborn, Mich., to tout how Democrats’ legislation will spur Ford’s production of new electric vehicles. “We’re doing everything we can on the LNG front to be helpful.”

But a complete shut off of Russian oil would threaten the U.S. economy more. Yellen has for months led her international counterparts in pushing for allies to unify around a set price for purchasing Russian oil, arguing that it could simultaneously undercut the Kremlin’s finances while safeguarding the world economy from energy shocks.

Moscow has reacted with fury. Speaking at a conference last week after the Group of Seven industrialized nations agreed to implement the measure, Putin said Russia’s reaction would be to “not supply anything.” “We will not supply gas, oil, coal, heating oil,” he said.

The United States announced a ban on Russian oil purchases in March, but if international oil prices soar because of a complete shutdown in Russian exports, American consumers would feel it.

“If Europe plunges into a depression after Russia shuts off energy exports and oil rises to $150 a barrel — there’s a possible impact to the U.S. there that’s really bad,” said Matthew J. Slaughter, an economist at Dartmouth College.

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That’s enough to worry economists whose optimistic forecasts White House aides like to cite.

“Russia will cut off their oil export before they take a big price discount,” said Mark Zandi, an economist at Moody’s Analytics. “That will push the economy into recession. Gasoline prices will go skyward, back over its record $5 a gallon almost overnight. The economy can’t digest $5 a gallon — that would be overwhelming.”

For now, however, Treasury officials are publicly adamant that Putin will not follow through with that threat. They also note that Europe had been planning to implement a full embargo on Russian oil, and that the price cap presents an opportunity for the Kremlin to continue to supply world markets.

“Russia may bluster and say they won’t sell below the capped price, but the economics of holding back oil just don’t make sense,” Deputy Treasury Secretary Wally Adeyemo said Friday.