Sunday, May 3, 2015

The Great Oil Game: Resource Crisis in Russia?

Weekly pageviews of "Resource Crisis." My blog seems to be having a remarkable success in Russia, but do the Russians understand the problem of resource depletion?


Complex structures, such as states and empires, are always prone to collapse and they usually give little or no previous warnings. The collapse of the Soviet Union, indeed, had not been predicted by anyone and it came completely unexpected. In the present crisis, instead, Western analysts seem to have fallen in the opposite mistake, predicting the rapid demise of the Russian Federation. But that didn't happen. On the contrary, the Russian economic system showed a remarkable resilience and it strongly rebounded after a bad moment, last year. (image below from Bloomberg).




So, predicting collapses is always very difficult in a world's situation that looks more and more like a Russian Roulette (an appropriate name in this context), but played with nuclear weapons. It might well be that some states which at present look very solid could be the ones to experience a sudden and unexpected Soviet-style implosion (let me not say which ones these states could be).

Let's go more in depth in this matter. The collapse of Russia was expected in the West mainly as the result of the recent crash of the world's oil market. That repeated the situation of the late 1980s, when the old USSR was bankrupted by a similar effect: a rapid fall of oil prices which strongly reduced the revenues from oil exports. However, the present situation is not exactly the same. The main difference is related to the perspectives of the oil market. In the 1980s, low oil prices were generated by new oil fields entering the market after the first oil crisis - for instance the North Sea. The supply increased and prices collapsed around 1985 at levels that today we can't even dream any more - around 20$-30$ in current dollars - and they remained there for nearly two decades.

Today, there is no equivalent of the new resources that had entered in production in the 1980s and the price collapse has been generated mainly by a demand slump. Additionally. what we call today "low prices" are at least twice as high (in current dollars) than they were in the 1980s. And these "low" prices are bankrupting the whole US tight oil industry. That can't be without effect in bringing back oil prices to the levels which were considered "normal" up to last year. Consider also that Russian production costs are not the highest in the world, as shown in this figure


The values shown in the figure are very uncertain but, as long as oil prices do not fall below US 40 $, Russia should be able to survive; and they seem to be doing exactly that. In the short term, at least, the "oil weapon" that some analysts saw as unleashed against Russia, failed to obtain its purpose.

Certainly, however, the question of the long term management of the Russian mineral resources cannot be ignored. There are elements indicating that Russia's oil production is peaking this year and, according to Ron Patterson, USA and Russia may peak together. How would their respective economies react to that? More in general, how will Russia manage the unavoidable long term depletion of the country's resources? What do the Russians want to do with their mineral wealth? Who is going to use it and for what purpose? Planning on the basis of the fundamental elements of the depletion process (*) would be the best for Russia to avoid a future resource crisis.


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(*) The problem of oil depletion is very poorly understood everywhere in the world, but, according to my personal experience, it may be that it is even less understood in Russia. For instance, over more than a decade of existence of the Association for the Study of Peak Oil (ASPO) there have been many national chapters (including ASPO-Italy). However, there has never been an ASPO-Russia (if you google for "ASPO Russia" you'll find the Astrakhan Shipbuilding Production Association, which is not exactly the same thing!). 







21 comments:

  1. Upon what data set do you base your statement "the price collapse has been generated mainly by a demand slump". I see no slump in demand. I see a price collapse that is caused by KSA selling at a discounted price. I cannot find data that supports a slup in demand occuring at the time KSA began selling at a discounted price.

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    1. The slump in demand has taken place mainly in Western Europe; at the same time growth in China has slowed down a lot. The data are easy to find if you look for them

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    2. At least in Spain the slump in demand since 2008 has been 30% and in road traffic. In The Energy Export Data Browser you can find plenty of data, like this one: http://mazamascience.com/OilExport/output_en/Exports_BP_2014_oil_bbl_ES_MZM_NONE_auto_M.png

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    3. "According to OPEC data, global demand in Q4 2014 increased by 1.4 mbpd, year-on-year, with 1.3 mbpd of increases from non-OECD countries and a rise in 0.1 mbpd in OECD countries"

      http://www.saudi-german-business-dialogue.com/dmdocuments/Quarterly_Oil_Market_Update_(Q4-2014).pdf

      I cannot find data that states Q4 of 2014 experienced a global reduction in oil demand. I find plenty of information, like that I posted above, that is to the contrary.

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    4. More of the same

      http://srsroccoreport.com/record-global-oil-demand-even-as-the-price-of-oil-declined/record-global-oil-demand-even-as-the-price-of-oil-declined/


      I submit that the drop in oil price was not caused by a slump in global demand. It was caused by KSA selling their wares at a discounted price that was not motivated by decreased demand. KSA has a reason for selling at a discounted price but it is not due to decreasing demand. As far as I can tell there is no evidence of decreasing demand in Q4 2014. It also seems to me that world oil rpoduction is at a record high and it is all being purchased.

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    5. Yes, of course you can cite many sources showing that the world's production has not decreased and it is also true that oil doesn't accumulate in warehouses, unburnt. The point, I think, is that prices have collapsed in the absence of a significant increase in production. In other words, as I state in the post - the situation is much different than it was in the late 1980s, when the build-up of the Saudi Production and the appearance on the market of the North Sea oil created a true glut of oil. Today, there is nothing like that. Then, of course, demand and offer are like positive and negative charges in chemistry. You can't measure one without the other

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    6. And let me add that Italy has lost 35% of its oil demand during the past 7-8 years. It is just one of the several European countries whose consumption of oil is dropping like a stone.

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    7. Dear Ugo,
      your analysis is remarkable and very reasonable. However, as I said once in a previous comment, I don't think that oil price drop can be explained exclusively by demand/offer dynamics... this would be quite naive. Demand certainly plays a role, but in order to get the big picture, I think, one should look at the geopolitics of US-Saudi, US-Russia, US-Venezuela interactions. Of course those dynamics are far more difficult to grasp and building robust statements geopolitics intellectual speculation is always very challenging, especially if one has no access to 'intelligence' data... but focusing only on 'neutral' market mechanisms can also be very misleading.
      I always enjoy reading you by the way ;)
      cheers

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  2. Dear prof. Bardi, regarding the success of your blog in Russia and USA, these are the same two countries that have been confronted during the fifty years of the Cold War and who have developed a system of intelligence and espionage and propaganda still in use. So no surprise that this blog (together with countless others) is closely monitored since the topic is very "vital" for both of them.

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    1. Ow.... So many KGB and CIA agents looking at my blog!! I'd better grow a fake beard.....

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    2. What I meant. dear prof., is that propaganda affects the way of thinking of the population (the concept of "empire", the "enemy", the "struggle" for the resources, etc.). You cannot push in conitinuously these cocepts for years without consequences. The ruling class of both countries, and on lesser extent the rest of the population, is more likely to look at the political side of depletion in terms of balance of power, rather than a systemic shift

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  3. https://www.iea.org/oilmarketreport/omrpublic/ Here the IEA shows oil demand rising from less than 90 mil barrels per day to 94 in the 3rd Q 2015. While the U.S. and Europe are slowing demand, the rest of the world continues to modernize with the global middle class demanding more and more energy for their cars and appliances.
    What I have seen is Saudi Arabia dramatically increasing production and massively shorting oil with dirivitives (along with U.S. banks) in order to strengthen their country. This policy has a three-fold effect. It crushes their arch enemy Iran's national income. It damages Russia, who is S.A.'s main obstacle to overthrowing Syria. It takes out the the shale oil industry, one of their primary competitors.

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  4. The fall of oil prices might have contributed to the collapse of USSR, but I don't think it was the main cause. The Soviet economy was semi-isolated and its dependency on foreign trade was not critical. Iran and Cuba survived economic sanctions for a quite a long time. The Soviet Union was much better positioned to survive any economic hardships. The problem was rather that the resource base, labour base, knowledge base, market size for this relatively small (USSR ~250 mln plus satellites ~100 mln people) semi-isolated economy reached the wall of diminishing returns. The Soviet government realised this and decided to open the country to the world. But after 70 years of isolation they didn't have the skills to do this. They simply mismanaged this process, botched their job of country governance. The Chinese did it more skilfully and were more successful.

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    1. The collapse of complex structures is always unpredictable and many factors are at play to generate it. You are right in mentioning that Cuba survived incredible hardships; and the same is true for the Soviet Union itself, which survived Hitler's tanks, then collapsed ignominiously under the hits of the gnomes of the financial market! It was not at all obvious that it would have had to collapse, just as it is not obvious at all that Russia will collapse now.

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    2. Hard to say what happens in a long run, but the last series of predictions of quick collapse of Russia was clearly biased. Some even predicted an imminent sovereign default, the rating agencies lowered Russia's rating. But elementary fact check shows that this is extremely improbable given the Russian currency reserves, debt level, and payment schedule.

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  5. Looking at your graphic it is obvious that idiots set American foreign policy. With production costs as low as they are in the Russian Federation Russia can obviously maintain with a reduced income. The simple advantages of low overhead. Combine that with a population inured to invasion where hardship and tightening of the economic belt produces patriotic fervor then predicting the rapid demise of the Russian Federation was foolish and irresponsible. You did a great job putting this one together Ugo.

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    1. And, right now, WTI went over 60 dollars again, despite the desperate attempts of the Saudis to keep it low.

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  6. The collapse of the USSR was predicted by Andrei Amalrik, who wrote a book titled "Will the USSR survive until 1984?". He was off by half a decade or so. Russian Roulette is actually American Roulette (the Russians don't particularly like revolvers). The fact that the fall in oil and gas revenues didn't do much damage to the Russian economy has to do with factors outside of energy: Russian industry has been on the path of import replacement, and now this trend is accelerating; Russian agriculture is one of the strongest in the world, ranking 1st, 2nd or 3rd in most agricultural commodities; Russian exports have increased 400% over the past decade. The Ruble has rebounded because Russia's central banker, Elvira Nabiullina, had the willpower and the nerves of steel to do what was needed, cranking up the REPO rate and freezing out all anti-Ruble speculators. Energy is important, but it's by no means the only aspect worth paying attention to.

    I believe I can speak to what Russia plans to do with its natural resources. In the long run, Russia wants to export them to friendly countries such as China, not to hostile countries such as NATO members. It also wants to use them internally, to develop domestic industry and to reduce import dependence, further lessening the need for energy exports. Instead of raw hydrocarbons, Russia wants to export high value-added products that enhance its manufacturing base. But in the short- to medium-term, Russia wants to use energy exports, especially to the EU, to preserve continuity and to avoid the EU following the Ukraine scenario. Whereas the US needs constant war in order to avoid collapse, and will even destroy its "friends" in the EU if need be, Russia profits from peace, and even if outright war eventually becomes inevitable, the more time that goes by, the stronger Russia becomes, and the weaker the US. Ideally, Russian diplomacy can avoid hot war long enough for the US to collapse on its own. It is bankrupt, piling up astronomic levels of debt just to keep going, it is fantastically corrupt, and its collapse is a matter of time. That is, in essence, the Russian strategy.

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    1. Yes, looking at the record for the ruble's performance, I think that Ms. Nabiullina has saved Russia, almost single-handedly. Imagine the atmosphere in Moscow when the Ruble lost 20% of its value in a single day! Nerves of steel, indeed. One day, they should make a monument to her in the Red Square

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  7. At the moment the world scenario seems incredibly complex, unstable and turbulent (to me) as geo-environmental and systemic factors interact with geo-economic, geo-financial and geopolitical ones. Maybe not a great time to make predictions? Naturally analyze and plan we must (to try to go forward, and besides what else would we do?) though " the best laid plans of mice and men most often come to..........? " ....let's see how the Americans, the Russians, the Chinese, the Saudis and the Europeans actually end up doing. If we're all still here in twenty years (including Mr Musk of course) I think we should all SMILE. I am cheering for them all but particularly for the ROW (rest of the world) where I now happen to live hoping that the Rows and fun and games of the others will leave us at least a bit of multi-dimensional space left over in which to try to survive and do "our (various) things"...

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Who

Ugo Bardi is a member of the Club of Rome and the author of "Extracted: how the quest for mineral resources is plundering the Planet" (Chelsea Green 2014)