Are Mercenary Armies Evil? From Malatesta Baglioni to Evgeny Prighozyn:

 During the siege of Florence in 1530, Michelangelo Buonarroti was actively fighting with the Florentine army. When the city fell, someone hid him in a secret room under the Santo Spirito Church. It is not open to the public, but I had a chance to visit it a few years ago. It is impressive to see the trapdoor built nearly 500 years ago still perfectly functioning. And when you walk into the secret room, you can see Michelangelo's drawings on the walls; the sensation is that he had left just a few days before. If these drawings still exist, and also other masterpieces by Michelangelo, is a merit of the "Condottiere" Malatesta Baglioni, who avoided a bloodshed by forcing Florence to surrender.

During the War of the League of Cognac (1526-1530), the condottiere Malatesta Baglioni was hired by the Florentine Republic to defend the city against the Imperial Army. In 1530, he switched sides. He ordered to turn the cannons of his army against his employers and to open the doors of the city to the besiegers. It was a quick fall for the Florentine Republic that, from that moment, ceased to exist. 

It was a typical behavior of mercenary armies, one of the reasons why they have bad fame from the time of Machiavelli's "The Prince." (1517). Machiavelli didn't see the siege of Florence in 1530 (he died in 1527), but what he wrote was prophetic. 

"Mercenaries and auxiliaries are useless and dangerous, and any ruler who relies on them to defend his state will be insecure and in peril ... Why? Because they have no affection for you, and no reason to go to battle except the small wages you pay them, and those aren’t enough to make them willing to die for you! 

Correct, but wait one moment. Does that mean that mercenary armies are an evil to be stamped out from the surface of the Earth? If we look at the details, Malatesta Baglioni switching sides in 1530 was not so much a betrayal as a masterpiece of diplomacy. It came one week after the main army of the Florentine Republic was decisively defeated by the Imperials. At that point, the war was over, Florence had lost. And Baglioni acted in consequence. He avoided further bloodshed and, among other things, if you can still see the city of Florence in its full Renaissance glory, it is because the agreements that led to the surrender in 1530 were honored by all the parties involved. The city was not sacked, and the citizens' lives were spared. 

Not that mercenaries won't occasionally engage in sacking cities and massacring civilians (there are a few examples in history) but if you can pay them to fight, you can also pay them to stop fighting. That's unlike the behavior of soldiers of national armies, often motivated by propaganda to hate their enemies. They will often fight to the end, which is bad for them and for everyone. 

So, let's try to compare the actions of Malatesta Baglioni with those of a much more recent mercenary condottiere, Yevgeny Prighozyn, and his "Wagner" troops in Russia. There is a clear similarity between Baglioni turning his cannons against Florence and Prighozyn directing his tanks against Moscow. In both cases, we have a mercenary captain betraying his employers. 

Baglioni acted on the perception that the Florentine Republic was already defeated, and he was correct. The Florentines didn't attempt to resist, choosing instead the path of least damage. Prighozyn may have acted on the basis of a similar perception, but he was completely wrong. We may speculate that he was banking on promises that he would be helped by forces inside or outside Russia. Maybe he expected a major Ukraine offensive, or an uprising in Moscow, or he simply was handsomely paid to do what he did. We'll never know for sure who pushed Prighozyn to rebel but, whoever they were, they betrayed him and left him and his soldiers alone against a much more powerful enemy: the whole Russian army. 

The interesting part of this story is how the attempted uprising was relatively bloodless. Prighozyn's men found themselves facing annihilation a few hundred miles from Moscow. Even if their boss hadn't told them to turn tail, they would have surrendered. That must have been clear to the Moscow authorities, too, and they didn't try to annihilate the mercenary column. They have better uses for a few thousand trained soldiers than exterminating them. The whole story ended, if not satisfactorily, at least without bloodshed. 

This is the good thing about mercenary armies. They are, in a sense, a step in the direction of purely robotic armies which will be the only ones fighting in the future. Robots don't fight for glory or for "the country;" they fight because they are programmed to fight. And their programmers probably think and behave like the "condottieri" of mercenary armies: they care mostly for money. War is never a good thing, but if it can be a little less bloody, it is at least an improvement. 

The Great Reset: The Western Path to Dekulakization

 

One of the Soviet propaganda posters promoting the collectivization of agriculture in the 1930s. On the lower right, you can see a small man opposing the line of the marching peasants, He is recognizable as a "Kulak," one of the local independent farmers who were dispossessed and partly exterminated to leave space for collectivized farms, considered more efficient. There exist several similarities between the fall of the Kulaki and the current "Great Reset" that sees the destruction of a number of economic activities, such as retail commerce, seen as inefficient in comparison to modern electronic commerce.

 

In the 1930s, the Soviet Union carried out the "dekulakization" (раскулачивание) of Ukraine. It was the term given to the removal of the relatively wealthy, independent farmers ("kulaki"), to be replaced by collective farms. Their properties were confiscated, many of them were relocated to remote regions, and some were exterminated. We don't know the exact numbers, but surely we are in the range of a few million people. The transition to collectivized farms may have been one of the causes of the great Ukrainian famine of the early 1930s, known as the "Holodomor," 

The reasons for the dekulakization are several. In part, they were related to the belief that large-scale, centrally planned enterprises were the most efficient way to organize production. Then, the Kulaki were seen as a potential enemy for the Soviet Government, while the region they occupied was a strategic asset in terms of food production in an age when famines were an effective war weapon. 

But these considerations are not enough to explain why the Kulaki were so ruthlessly destroyed in just a few years. It was, rather, just a simple power game: the Soviet Government aimed at controlling all the means of production of the state. It couldn't tolerate that an important section of the economy, food production in Ukraine, was independently managed. And so it intervened with all the might it could muster.

The most interesting part of this story is how the removal/extermination was an early example of a successful propaganda-based demonization campaign. The Kulaki were consistently portrayed as inefficient and unreliable "enemies of the people." Once it was established that an independent farmer was an enemy of the people, then any attempt to defend the Kulaki would automatically turn defenders into enemies of the people. So, the Kulaki were completely overwhelmed, unable to organize any kind of collective resistance. The best they could do was some degree of passive resistance, for instance by hiding food rather than delivering it to the Soviet authorities. Of course, propaganda exploited that to reinforce the message that they were, indeed, enemies of the people. This is the way propaganda works.

At this point, I guess you understand the point I am making: the similarity of the current situation with the dekulakization of nearly a century ago. Also this time, an entire sector of the economy (actually more than one) is being crushed to leave space for different economic entities, believed to be more efficient with providing the same services: mainly the "new economy" of the Silicon Valley companies. This shift is sometimes called "The Great Reset." An appropriate name that could also be applied to the dekulakization. 

The first victim of the Great Reset has been retail commerce. Mom and pop shops everywhere are the modern Kulaki, replaced by the onward marching militias of virtual commerce under the Amazon banner. But also franchises and shopping malls have been badly hit. It is impressive how nobody in the field dared to oppose the destruction of the source of their livelihood -- they were overwhelmed by propaganda, just like the Kulaki. 

Other victims are waiting for the axe: Universities and schools are going to be defunded, obsolete against the onrush of e-learning. Public transport has become nearly useless with the triumph of virtual work and the fear of boarding a crowded bus: it will be replaced by the smart cars and using AI software. Mass tourism and mass air travel are already relics of the past, resources that can be saved and used for other purposes. And the pervasive control of everyone is advancing: now just as at the time of the Soviet Union, those who control the message control everything. In comparison with Soviet times, the modern propaganda effort is similar. Most propaganda is based on demonizing someone and, today, those opposing the Great Reset are labeled as "deniers" (the equivalent of the "enemies of the people" of Soviet times). 

All that doesn't mean that the Great Reset was planned in advance, nor that the virus was manufactured on purpose. It simply means that the various actors in the economic arena saw how they could gain an advantage by acting in a certain way, and they did. These large organizations do not really plan in advance, they have no "brain," but -- like amoebas -- they move in the direction of the food they need. And they act on the principle that says, "never let a good crisis go wasted."

Of course, the Silicon Valley Companies of our times are not the same thing as the Soviet Government of the 1930s. But there are similarities. Those companies that dominate the management of information on the Web operate very much Soviet-style: they are large, pyramidal organizations, often dominated by a charismatic leader (Zuckerberg, Gates, Bezos, etc.). In terms of size and planning style, they are not different from the People's Commissariat for Agriculture (Народный комиссариат земледелия) (Narkomzem), established in 1917, the entity that carried out the dekulakization. And they reason mainly in terms of power balance: they don't like and they don't tolerate competition. 

The difference is that the Narkomzem was part of the state, whereas the Silicon Valley companies are not. They do control large swats of the American government but, on the whole, they are best seen as feudal lords. You can call them "Web Barons."

The current situation looks not unlike when King John of England signed the Magna Carta at Runnymede in 1215, forced to do so by England's Barons. Right now, the US government seems to be overwhelmed by the Barons of the Web, not unlike King John of England was. At least, when you hear that Twitter can cancel the account of the President of the United States, then you understand who is the boss. 

And here we stand: we are seeing a classic situation in history: a central government being challenged by feudal lords. It is typical of when a state starts its downward path toward collapse, it is what's happening with the Western Empire. So, what's going to happen, now? Can history serve as a guide for us?

History, we know, always rhymes, but never repeats itself. In the 1930s, the Kulaki were destroyed by superior powers and that was the end of the story. Today, the situation is much more fluid. 

For one thing, there is not a single, monolithic entity involved. We have several Barons who temporarily found a common goal, but which are potentially in conflict with each other. Then, the US government is not so weak yet. It still controls (and is controlled by) the military, and that's the crucial element that may change many things. 

It is not clear what the military think of the current situation. Probably they don't have special objections about the elimination of retail commerce and other obsolete economic activities. But they also understand who is paying them: they get their money not from the Web Barons, but from the Government. And they may decide to do something to avoid going the same way as mom and pop shops. A few tanks in front of the Capitol Building would send a much clearer message to the Web Barons than that conveyed by a half-naked, horned shaman. 

If the government is backed by a credible military force, then it would be possible to reduce the power of the monopolies of the Web: Facebook, Google, Microsoft, and the others could be nationalized and/or broken down into less powerful entities. On the other hand, nothing prevents the Web Barons from building up their own military forces. Fluid situation, indeed. 

The only sure thing is that the decline of the West is ongoing. There is little that can be done about that.

After publishing this post, I discovered that the same concept had been developed by another Cassandra, on the "The Cassandra Times" blog. That post came before mine, and it has therefore the honor of being the first having noted that the modern small business owners are the equivalent of the Kulaks of Soviet times.

The mind of empires: the story telling approach to strategy

This video is making the rounds on the Web. Here, Mr. George Friedman speaks of strategic matters in Europe and argues that the objective of the United States is to contain Russia in order to maintain their world empire. (note: this video has been removed from youtube after the publication of this post, but you can still find it at https://www.youtube.com/watch?v=ekiJVXba_o0

What is that motivates governments in taking decisions that so often turn out to be tragically wrong? The problem is that we have no data on the inner functioning of most governments; that is, we don't know what leaders say to each other when discussing in private. We can, however, have some idea on the way of thinking of governments if we look at the public pronouncements of that category of "experts" that go under the name of "strategic advisers".

I have no direct experience in military matters, but I do in a field that is just as strategic; that of the energy supply and, more in general, the supply of mineral commodities that makes a country's economy function. In this field, I have encountered several specimens of the category of the "policy advisers" who are supposed to whisper wisdom in the ear of the world leaders. These people tend to use a story-based approach; something that I would define as "story telling based strategy."

I have already reported how someone who advised the Spanish government described the world's oil market in purely narrative terms; giving roles to each major producer and having them play in the great theater of the world. And his narration was totally unencumbered by facts and data. The clip shown at the beginning of this post has a very similar style. Mr. Friedman's epistemology of international matters seems to be based on a basic narrative concept: major world governments are given roles and then they are described as playing these roles in the world theater. The resulting play is not encumbered by data; it is, after all, pure narrative; story telling based epistemology. 

Least you accuse me of speaking without data myself, let me bring up at least one historical example of this approach. I can picture in my mind a cabinet reunion of the Italian government at some moment, in late 1941. I can imagine Mr. Mussolini standing up and saying, "You know, guys? I have an idea: we should declare war on the United States!" And everyone in the room nods and says, "Yeah, great idea, chief! Let's do that!"

What led the Italian government to take this disastrous decision? I think it can be explained in terms of the narrative models that they had in their minds. The documents we have from that time tell us that, in their minds, the dominant narration was that the Mediterranean Sea was an Italian lake. The US - as they saw the situation - had no more interest in controlling the Mediterranean Sea than Italy had in controlling the Gulf of Mexico. I don't know if Mussolini was influenced by some policy advisers in developing this narration, but it is clear that he and the whole Italian government badly misjudged the quantitative factors involved; that is the tremendous US military potential in terms of the human and natural resources it could muster.

Do you think this example is an exception? I don't think so. Imagine a reunion of the Japanese government, also in 1941, with someone standing up and stating: "gentlemen, it is obvious that if we attack the Americans at Pearl Harbor, they will surrender to us immediately afterward.." Their story telling models cast the Americans as weaklings who could be easily intimidated. Again, lack of quantitative data on the extent of the US human and natural resources led to disaster.

There are several more recent examples of monumental mistakes made by governments; we could discuss more of them, but it seems that the concept that government officers work on the basis of narrative models can explain most of what has been happening in the world. And, if they continue in this way, God knows what kind of new monumental mistakes will be made.

Mr. Friedman's speech is a good example of a narrative (unencumbered by data) that could shape the strategic thought of a government. It cannot be understood simply from the clip which is making the rounds on the Web. The complete speech is not just about warmongering, it is not simply an imperial advocacy speech (in part it is, though). It is a fascinating speech that deserves to be listened at. The problem with this kind of speeches that the fascination of story telling hides the ugly details of reality. There is no mention in the speech about the fact that not even an empire can plan wars without worrying about where it can find the resources needed. To be fair, Friedman does mention that if Germany and Russia were to form an alliance, they would have the resources to challenge the American Empire. But he never seems to wonder where the resources that created and maintain the American Empire are coming from right now and for how long they can keep coming. For instance, when he mentions oil prices, he says that low prices are "the new normal". And that, I think, says a lot the limits of storytelling as a guide to understand the world. (To say nothing about the lack of any mention about the grim reaper character waiting to go on stage: climate change).

In the end, these narrative models for leaders are just somewhat more sophisticated versions of the ones used by the media for "consensus building". These are based on the simplest and most primitive narrative device we know: "we are the good guys and they are the bad guys". In their public declarations, high level government officers will often follow the media narrative. Occasionally, however, as with these declarations by Mr. Friedman, their inner mental models briefly surface up from the depth of cabinet reunions. Do some governments know what they are doing? Probably yes, but, from the historical record of humankind, it must be a rare condition.

Our curse as human beings seems to be that we keep trying to force the world to behave according to mental models that were developed by our ancestors of long, long ago. Role playing models were probably working well when we were living in tribes of a few hundred individuals. They don't work anymore with those entities we call "states" or "nations", encompassing tens or hundreds of millions of people.  Will we ever understand that we have to base our decisions on reality? Maybe, but we'll have to be taught some more harsh lessons by the real world before we learn.

Seven shocking events of 2014

The killing of the female bear known as Daniza, in Italy, has been the paradigmatic event of a disastrous year of senseless violence against humans and non-humans alike (image above by Helga Marsala).

Being involved with peak oil studies should make one somewhat prepared for the future. Indeed, for years, we have been claiming that the arrival of peak oil would bring turmoil and big changes in the world and we are seeing them, this year. However, the way in which these changes manifest themselves turns out to be shocking and unexpected. This 2014 has been an especially shocking year; so many things have happened. Let me list my personal shocks in no particular order


1. The collapse of oil prices. Price oscillations were expected to occur near the oil production peak, but I expected a repetition of the events of 2008, when the price crash was preceded by a financial crash. But in 2014 the price collapse came out of the blue, all by itself. Likely, a major financial crisis is in the making, but that we will see that next year.

2. The ungreening of Europe. My trip to Brussels for a hearing of the European parliament was a shocking experience for me. The Europe I knew was peaceful and dedicated to sustainability and harmonic development. What I found was that the European Parliament had become a den of warmongers hell bent on fighting Russia and on drilling for oil and gas in Europe. Not my Europe any more. Whose Europe is this?

3. The year propaganda came of age. I take this expression from Ilargi on "The Automatic Earth". Propaganda is actually much older than 2014, but surely in this year it became much more shrill and invasive than it had usually been. It is shocking to see how fast and how easily propaganda plunged us into a new cold war against Russia. Also shocking it was to see how propaganda could convince so many people (including European MPs) that drilling more and "fracking" was the solution for all our problems.

4. The Ukraine disaster. It was a shock to see how easily it was for a European country to plunge from relative normalcy into a civil war of militias fighting each other and where citizens were routinely shelled and forced to take refuge in basements. It shows how really fragile are those entities we call "states". For whom is the Ukraine bell tolling?

5. The economic collapse of Italy. What is most shocking, even frightening, is how it is taking place in absolute quiet and silence. It is like a slow motion nightmare. The government seems to be unable to act in any other way than inventing ever more creative ways to raise taxes to squeeze out as much as possible from already exhausted and impoverished citizens. People seem to be unable to react, even to understand what is going on - at most they engage in a little blame game, faulting politicians, immigrants, communists, gypsies, the Euro, and the great world conspiracy for everything that is befalling on them. A similar situation exists in other Southern European countries. How long the quiet can last is all to be seen.

6. The loss of hope of stopping climate change. 2014 was the year in which the publication of the IPCC 5th assessment report was completed. It left absolutely no ripple in the debate. People seem to think that the best weapon we have against climate change is to declare that it doesn't exist. They repeat over and over the comforting mantra that "temperatures have not increased during the past 15 years", and that despite 2014 turning out to be the hottest year on record.

7. The killing of a bear, in Italy, was a small manifestation of wanton cruelty in a year that has seen much worse. But it was a paradigmatic event that shows how difficult - even impossible - for humans to live in peace with what surrounds them - be it human or beast.


And this is just a partial list of the many shocking things of this year (maybe we can discuss that more in the comments). Then, what shocks will we see in 2015?

Bringing the message about resource depletion to the European Parliament

With 24 languages deemed as "official," the European Union shares some characteristics with the ancient Babel Tower (above, the parliament building in Strasbourg). The Babel of languages is one of the problems associated with trying to pass messages to politicians, but not the most important one. Rather, the main problem seems to be a decisional mechanism which favors groupthink.  Here are some notes of a recent experience of mine at a hearing on energy security of the European Parliament in Brussels.

As I walk to the hearing on energy security in Europe, I am struck first of all by the size of the hall. The "Alcide De Gasperi" room in the palace of the European Parliament in Brussels was clearly built for impressing people, in addition to its function as a meeting room. One of its most remarkable features is the long row of windows of the interpreters' rooms. Since there are 24 official languages of the European Union, there have to be some 50 interpreters working in there. Then, I also notice how the screens for projecting one's slides are small and located high up, near the ceiling. This is not a place where you are supposed to support your statements with data and graphs. It is a place built for political debate.

As people collect in the hall, I can see that the atmosphere is rather formal, with several members of the European Parliament sitting in the audience. Most people are dressed in suits and many wear ties. On the podium, there are six invited speakers. And there we go; I immediately sense the mood of the conference: this is not a scientific meeting. None of the speakers seem to be an expert about fossil fuels, intended as markets, production, resources, reserves, and the like. Rather, they seem to be mainly concerned with strategic and political issues. The line that emerges from the presentations and from the reactions of the audience is clear: it is a highly confrontational attitude (to put it mildly) toward Russia, accused to be engaging in an economic war against Western Europe. The gist of what I hear is that the European Union must unite in defense; we must follow the example of the United States and get rid of our silly regulations and of the local resistance against drilling and nuclear plants. Europe can exploit its shale gas and oil resources (and also nuclear energy) and attain energy independence, as the United States did. It is "drill, drill, drill" all over.

This line, in various shades, is the position of four speakers out of six. The bias in favor of fossil fuels is shown also by the fact that the lady charged with defending renewables is given the last time slot of the hearing. The fossil oriented attitude seems to be shared by the majority of the audience. Not that it is not challenged by some of the MEPs in the room. One of them (I know him well, he has been a long time ASPO supporter) stands up and tells to one of the speakers: "it is not true that the United States has attained energy independence. You have to stop getting your data from newspapers!". He is right, (you can look at the data yourself). But it is an isolated reaction, and the overall debate remains based on the idea that the US has become energy independent or that, at least, it will soon become independent.

When it is my turn to speak, I tell a different story. I try to explain that the ultimate origin of the energy security problems in Europe is due to depletion, and that drilling more is not the solution. I keep the message as simple as possible; tailored for people who are not specialists in oil and gas. I show the price trends, I tell them something about energy return, and I make the point that renewable energy is not subjected to depletion. I sense that my talk is well received: the people in the audience listen to what I say, and they look up at my slides (but those screens are too high and too small, dammit!). I also get several questions and comments - mostly favorable ones. After the hearing is over, several people stop me to discuss further about what I said. As a talk, it was a reasonably successful one.

But, on the whole, I think I had a very modest impact, if any. As I noticed many times, it is extremely difficult to pass to decision makers messages which are perceived as out of the ordinary, as the message on resource depletion is. The problem has many facets and it has to do, mainly, with the way politicians think. According to my experience, politicians - especially high level ones - are very smart people. The problem is that they are swamped with information; just as most of us. So, in the great mass of data arriving, how do you decide what is the truth? If you are a scientist - or you are scientifically trained - you have ways to evaluate the data and filter out the bad ones. But politicians are not scientists, they are not scientifically trained, so they use a different method. They maintain a healthy dose of skepticism about everything they hear; they don't pay too much attention on data, and they tend to side with the interpretation that they perceive as the most compatible with the general opinion of the group they belong to.

There are reasons for this "groupthink" syndrome that, probably, affects politicians more than most of us. It is because then main tool in the political struggle, today, is the demonization of adversaries. So, a politician is very careful to avoid to be singled out from the crowd of colleagues and subjected to the standard demonizing treatment. For a politician, there is safety in crowds; a traditional strategy well known also by sheep and fish. In practice, you may see a politician as having a built in opinion detector in his head. He/she will sense the position of the majority and try to avoid straying too far away from it. In general, the way for a politician to obtain power is to occupy the center; to be seen as a moderate. That this is the way to success has been known for a long time; even rigorously modeled (in economics, it is known as the "Hotelling's law"). Scientists are sometimes contrarians, politicians almost never are. 

So, I think I can figure out the reaction of most of the MEPs to the hearing on energy security in Brussels. It was something like, "Well, that Italian guy who spoke about resource depletion might have a point about what the real problem is. I couldn't his slides so well, so high up near the ceiling, but he seemed to have some good data. But, on the other hand, the other speakers saw the problem differently. If most people in the parliament think that Russia is waging an economic war against us and that drilling more is a good idea, then there has to be something in it. For sure, I shouldn't take the risk of siding with a minority option."



Ugo Bardi teaches at the University of Florence, Italy. He is a member of the Club of Rome and the author of "Extracted, how the quest for mineral wealth is plundering the planet" (Chelsea Green 2014)

The collapse of oil prices and energy security in Europe

This is a written version of the brief talk I gave at the hearing of the EU parliament on energy security in Brussels on Nov 5, 2014. It is not a transcription, but a shortened version that tries to maintain the substance of what I said. In the picture, you can see the audience and, on the TV screen, yours truly taking the picture.

Ladies and gentlemen, first of all, let me say that it is a pleasure and an honor to be addressing this distinguished audience today. I am here as a faculty member of the University of Florence and as a member of the Club of Rome, but let me state right away that what I will tell you are my own opinions, not necessarily those of the Club of Rome or of my university.

This said, let me note that we have been discussing so far with the gas crisis and the Ukrainian situation, but I have to alert you that there is another ongoing crisis - perhaps much more worrisome - that has to do with crude oil. This crisis is being generated by the rapid fall in oil prices during the past few weeks. I have to tell you that low oil prices are NOT a good thing for the reasons that I will try to explain. In particular, low oil prices make it impossible for many oil producers to produce at a profit and that could generate big problems for the world's economy, just as it already happened in 2008.

So, let me start with an overview of the long term trends of oil prices. Here it is, with data plotted from the BP site.

These data are corrected for inflation. You see strong oscillations, but also an evident trend of growth. Let's zoom in, to see the past thirty years or so:

These data are not corrected for inflation, but the correction is not large in this time range. Prices are growing, but they stabilized during the past 4-5 years at somewhere around US 100 $ per barrel. Note the fall during the past month or so. I plotted these data about one week ago, today we are at even lower prices, well under 80 dollars per barrel.

The question is: what generates these trends? Obviously, there are financial factors of all kinds that tend to create fluctuations. But, in the end, what determines prices is the interplay of demand and offer. If prices are too high, people can't afford to buy; that's what we call "demand destruction". If prices are too low, then it is offer that is destroyed. Simply, producers can't sell their products at a loss; not for a long time, at least. So there is a range of prices which are possible for oil: too high, and customers can't buy, too low, and companies can't sell. Indeed, if you look at historical prices, you see that when they went over something like 120 $/barrel (present dollars) the result was a subsequent recession and the collapse of the economy.

Ultimately, it is the cost of production that generates the lower price limit. Here, we get into the core of the problem. As you see from the price chart above, up to about the year 2000, there was no problem for producers to make a profit selling oil at around 20 dollars per barrel. Then something changed that caused the prices to rise up. That something has a name: it is depletion.

Depletion doesn't mean that we run out of oil. Absolutely not. There is still plenty of oil to extract in the world. Depletion means that we gradually consume our resources and - as you can imagine - we tend to extract and produce first the least expensive resources. So, as depletion gradually goes on, we are left with more expensive resources to extract. And, if extracting costs more, then the market prices must increase: as I said, nobody wants to sell at a loss. And here we have the problem. Below, you can see is a chart that shows the costs of production of oil for various regions of the world. (From an article by Hall and Murphy on The Oil Drum)

Of course, these data are to be taken with caution. But there are other, similar, estimates, including a 2012 report by Goldman and Sachs, where you can read that most recent developments need at least 120 $/barrel to be profitable. Here is a slide from that report.

So, you see that, with the present prices, a good 10% of the oil presently produced is produced at a loss. If prices were to go back to values considered "normal" just 10 years ago, around 40 $/barrel, then we would lose profitability for around half of the world's production. Production won't collapse overnight: a good fraction of the cost of production derives from the initial investment in an oil field. So, once the field has been developed, it keeps producing, even though the profits may not repay the investment. But, in the long run, nobody wants to invest in an enterprise at so high risks of loss. Eventually, production must go down: there will still be oil that could be, theoretically, extracted, but that we won't be able to afford to extract. This is the essence of the concept of depletion. 


The standard objection, at this point, is about technology. People say, "yes, but technology will lower costs of extraction and everything will be fine again". Well, I am afraid that it is not so simple. There are limits to what that technology can do. Let me show you something:

That object you see at the top of the image is a chunk of shale. It is the kind of rock out of which shale oil and shale gas can be extracted. But, as you can imagine, it is not easy. You can't pump oil out of shales; the oil is there, but it is locked into the rock. To extract it, you must break the rock down into small pieces; fracture it (this is where the term "fracking" comes from). And you see on the right an impression of the kind of equipment it takes. You can be sure that it doesn't come cheap. And that's not all: once you start fracking, you have to keep on fracking. The decline rate of a fracking well is very rapid; we are talking about something like a loss of 80% in three years. And that's expensive, too. Note, by the way, that we are speaking of the cost of production. The market price is another matter and it is perfectly possible for the industry to have to produce at a loss, if they were too enthusiastic about investing in these new resources. It is what's happening for shale gas in the US; too much enthusiasm on the part of investors has created a problem of overproduction and prices too low to repay the costs of extraction.

So, producing this kind of resources, the so called "new oil" is a complex and expensive task. Surely technology can help reduce costs, but think about that: how exactly can it reduce the energy that it takes to break a rock into fine dust? Are you going to hammer on it with a smartphone? Are you going to share a photo of it on Facebook? Are you going to run it through a 3D printer? The problem is that to break and mill a piece of rock takes energy and this energy has to come from somewhere.

Eventually, the fundamental point is that you have a balance between the energy invested and the energy returned. It takes energy to extract oil, we can say that it takes energy to produce energy. The ratio of the two energies is the "Net Energy Return" of the whole system, also known as EROI or EROEI (energy return of energy invested). Of course, you want this return to be as high as possible, but when you deal with nonrenewable resources, such as oil, the net energy return declines with time because of depletion. Let me show you some data.

As you see, the net energy return for crude oil (top left) declined from about 100 to around 10 over some 100 years (the value of 100 may be somewhat overestimated, but the trend remains the same). And with lower net energies, you get less and less useful energy from an oil well; as you can see in the image at the lower right. The situation is especially bad for the so called "new oil", shale oil, biofuels, tar sands, and others. It is expected: these kinds of oil (or anyway combustible liquids) are the most expensive ones and they are being extracted today because we are running out of the cheap kinds. No wonder that prices must increase if production has to continue at the levels we are used to. Then, when the market realizes that prices are too high to be affordable, there is the opposite effect; prices go down to tell producers to stop producing a resource which is too expensive to sell.

So, we have a problem. It is a problem that appears in the form of sudden price jumps; up and down, but which is leading us gradually to a situation in which we won't be able to produce as much oil as we are used to. The same is true for gas and I think that the present crisis in Europe, which is seen today mainly as a political one, ultimately has its origin in the gradual depletion of gas resources. We still have plenty of gas to produce, but it is becoming an expensive resource.  It is the same for coal, even though so far there we don't see shortages; for coal, troubles come more from emissions and climate change; and that's an even more serious problem than depletion. Coal may (perhaps) be considered abundant (or, at least, more abundant than other fossil resources) but it is not a solution to any problem.

In the end, we have problems that cannot be "solved" by trying to continue producing non renewable resources which in the long run are going to become too expensive. It is a physical problem, and cannot be solved by political or financial methods. The only possibility is to switch to resources which don't suffer of depletion. That is, to renewable resources.

At this point, we should discuss what is the energy return of renewables and compare it to that of fossils. This is a complex story and there is a lot of work being done on that. There are many uncertainties in the estimates, but I think it can be said that the "new renewables", that is mainly photovoltaics and wind, have energy returns for the production of electrical energy which is comparable to that of the production of the same kind of energy from oil and gas. Maybe renewables still can't match the return of fossils but, while the energy return of fossil keeps declining, the return of renewables is increasing because of economies of scale and technological improvements. So, we are going to reach a crossing point at some moment (maybe we have already reached it) and, even in terms of market prices, the cost of renewable electric power is today already comparable to that of electric power obtained with fossil fuels.

The problem is that our society was built around the availability of cheap fossil fuels. We can't simply switch to renewables such as photovoltaics, which can't produce, for instance, liquid fuels for transportation. So, we need a new infrastructure to accommodate the new technologies, and that will be awfully expensive to create. We'll have to try to do our best, but we cannot expect the energy transition - the "energiewende" - to be painless. On the other hand, if we don't prepare for it, it will be worse.

So, to return to the subject of this hearing, we were discussing energy security for Europe. I hope I provided some data for you that show how security is ultimately related to supply and that we are having big problems with the supply of fossil energy right now. The problem can only increase in the future because of the gradual depletion of fossil resources. So, we need to think in terms of supplies which are not affected by this problem. As a consequence, it is vital for Europe's energy security to invest in renewable energy. We shouldn't expect miracles from renewables, but they will be immensely helpful in the difficult times ahead.

Let me summarize the points I made in this talk:

Thank you very much for your attention and if you want to know more, you can look at my website "Resource Crisis". www.cassandralegacy.blogspot.com




Ugo Bardi teaches at the University of Florence, Italy. He is a member of the Club of Rome and the author of "Extracted, how the quest for mineral wealth is plundering the planet" (Chelsea Green 2014)

Unleashing the oil weapon against Russia: how to destroy a great empire

The Pythoness of the Oracle of Delphi told to King Croesus that if he were to attack Persia "a great empire will be destroyed." Croesus did just that, but the great empire which fell was not the Persian one, but his own. 

Do you remember the old Soviet Union? Dubbed as "The Evil Empire" by Ronald Reagan in 1983, it disappeared in a puff of smoke in 1991, crushed under a mountain of debts. The origins of the financial collapse of the Soviet Union are rather well known: it was related to the fall of the oil prices which, in 1985, went down from the equivalent of more than 100 (today's) dollars per barrel in 1980 to about 30 (today's) dollars and stayed low for more than a decade. The Soviet Union was relying on oil exports for its economy and, in addition, it was burdened with huge military expenses. It just couldn't take a drop of more than a factor of three in its oil revenues. 

There exists a persistent legend that says that the downfall of the Soviet Union was engineered by a secret agreement of the Western Powers with the Saudi government who agreed to open the spigots of their oil fields in order to bring down oil prices. This is, indeed, nothing more than a legend. Not only we have no proof that such a secret agreement ever existed, but it is not even true that the Saudis played the role attributed to them. In the 1980s, Saudi Arabia, actually, tried hard to avoid the downfall in oil prices by reducing (rather than increasing) its oil output; without much success. (Image on the right from Wikipedia)

It is true, however, that after the first great oil crisis of the 1970s, the world's oil production restarted its growth around 1985.  The reasons for the recovery can't be attributed to the work of a group of conspirators sitting in a smoke filled room. Rather, it was the result of a number of new oil fields starting their production phase, mainly in Alaska and in the North Sea. This was the origin of the drop in oil prices and, indirectly, of the fall of the Soviet Union. (Image on the left from Wikipedia)

Today, Russia's oil production has recovered from the downfall of Soviet times and the Russian economy is highly dependent on oil exports, much like the old USSR was. So, a drop in oil prices could do a lot of damage to Russia. Given the political situation with the Ukraine crisis, there are speculations that the West is trying to bring down Russia by repeating the same trick that seemed to be so successful in bringing down the old "Evil Empire". Indeed, we are seeing oil prices dropping below $90 per barrel after years of stability around $100. Is it a fluctuation or a trend? Hard to say, but it is being interpreted as the unleashing of the "oil weapon" against Russia on the part of Saudi Arabia. 

However, the world of today is not the world of the 1980s. One problem is that Saudi Arabia has shown several times to be able to throttle production down, but never to raise it significantly higher than the present levels; one could even question whether they will be able to maintain them in the future. Then, there is nothing today which could play the role that Alaska and the North Sea fields played in the 1980s. It had been said many times that we would need a "new Saudi Arabia" (or more than one) to offset the decline of the world's oil fields, but we never found it.

Yet, there are good reasons to think that we could see a drop in oil prices in the near future. One factor is the downturn of several of the world's major economies (e.g. Italy). That could lead to a fall of the demand for oil and, consequently, to lower prices (something similar took place with the financial crisis of 2008). Another factor could be the rapidly growing production unconventional oil (largely in the form of "shale oil") is the U.S. This oil is not being exported in large amounts, but it has reduced the US demand of oil in the world's market. Coupling these two factors, we might well see a considerable drop in oil prices in the near future, although hardly a sustained one. So, would that be the "oil weapon" that will bring Russia to its knees? Maybe, but, as with all weapons, there are side effects to consider.

As we said, unconventional oil is playing a major role in maintaining the world's production. The problem is that unconventional oil is often an expensive resource. Then, in the case of shale oil, the decline rate of wells is very fast: the lifetime of a well is of just a few years. So, the shale oil industry needs a continuous influx of new investments to keep producing and it is very sensitive to oil prices. Its recent rise was the result of high prices; low prices might cause its demise. In contrast, conventional oil fields have a lifetime of decades and are relatively immune to short term variations of oil prices. If we see the situation in these terms, we might legitimately ask against whom the oil weapon is aimed. The US unconventional oil industry might well be its first victim.

History, as we all know, never repeats itself, but it does rhyme. King Croesus, at his times, believed the Delphic Oracle when he was told that he could bring down a great empire if he would attack Persia. He didn't realize that he was going to destroy his own empire. Something similar may be in store for us in the coming years: a drop in oil prices might well bring down a great empire. Which one, however, is all to be seen.

A tale of a powerful empire and of a riotous kingdom

History, it is said, doesn't repeat itself, but it does rhyme. In particular, the times of the Roman Empire are a remarkable source of events rhyming with those of modern times. For instance, the ancient Romans had developed a number of propaganda technologies which were remarkably similar to the ones we use today. The image above (source), from the Trajan column in Rome, may be seen as accusing Rome's enemies of the time, the Dacians, of preparing for war by building a fortress - perhaps breaking a previously agreed pact. So, let me tell a tale of Roman times. I won't tell you what exactly it rhymes with in our times, but I think it will be easy for you to understand.

The Roman Empire had become rich and powerful on the precious metals, gold and silver, that the Romans mined in Spain. (the details are described here, and here). The problem for the Romans was that gold is a mineral resource and mineral resources don't last forever.

With the first century of our era, the production of gold and silver from the Roman mines started declining and the Empire started showing signs of trouble. The Jewish revolt of 66 CE was one of these signs: it almost destroyed the Empire. Eventually, however, the Romans managed to crush the rebellion and, by sacking Jerusalem, they obtained a nice stash of gold to replenish their badly depleted reserves. But the problem remained: the gold sacked in Jerusalem could not last forever. How to get the gold necessary to pay the legions which ensured the Empire's survival?

At this point, the Romans noticed that a small a kingdom on their North-Western border, Dacia, still had producing gold mines. The Dacians had been building up their production and by the start of the 2nd century CE they could dream of using this gold to their advantage; maybe to create a small empire of theirs.

The situation was clear: the Romans needed gold, the Dacians had it. The Roman had a powerful army, the Dacians a much less powerful one. The consequences were obvious: the Romans invaded Dacia during the early years of the 2nd century CE. It was a risky gamble, because the Dacians put up a stiff resistance, but eventually they were defeated and the Romans took control of their gold mines. With the newly found gold, the Romans tried to conquer their rival empire: Parthia, on their Eastern border. They failed miserably at that. If the gold of Spain had yielded a whole empire to the Romans, the gold of Dacia yielded strictly nothing except Dacia itself. And Dacia was the first border province to be abandoned by the empire less than two centuries after having been conquered. Then, the empire which slowly faded away from history as it was condemned to do.

This is the story. Now, as a little exercise in history-rhyming, let's list its main elements.

• A powerful empire plagued by excessive military expenses and by declining mineral resources (Rome)
• A short lived boost of resources for the empire (the sack of Jerusalem)
• A growing regional power, with still productive mineral resources (Dacia)
• A large rival empire (Parthia) 
• A remarkable capability of using propaganda for military purposes (Rome)

Now, try to fit in this scheme the modern equivalents of the ancient ones. As you can see, history really rhymes a lot. It is not surprising: the way humans behave is determined by the way their brain works. And that has not changed much in the past and - from what we are seeing happening around us nowadays - is not changing at all.

But one more thing that history teaches us is how futile some human efforts are. Think again of the desperate attempt of the Romans to conquer Dacia. They succeeded, but they took a tremendous risk: the campaign was enormously expensive and, had they failed, the result could not have been anything but the disintegration of the empire. And, anyway, the gold of Dacia turned out to be insufficient to keep the empire expanding. The Roman Empire, just like our modern economy, could survive only by growing. Once it couldn't grow any longer, it withered and died.

So, conquering Dacia was a reckless gamble, an enormous cost, and a lot of destruction; and all that just postponed the unavoidable. Will the present world situation evolve in the same way? We can't say for sure, but it is certain that history rhymes a lot. 

Russia's Smart Move to Asia

In this post, professor Tatiana Yugay, of the Moscow State University of economics, reports  from Saint Petersburg about the recent Russia-China deal. See also a previous post on the subject.




By Tatiana Yugay

In my previous post at Ugo Bardi's blog, I suggested that “Russia but not the U.S. has been pivoting to Asia just now”. Since then several landmark events happened in the Asian arena, such as, Vladimir Putin's successful visit to China and the conclusion of a $400 billion gas mega-deal between Russia's Gazprom and China's CNPC along with other important 50 agreements, the Russian-Chinese navy drills in the East-China Sea and Obama's visit to East Asia in order to alert his Asian allies. Last but not least, signing the Treaty on the Foundation of the Eurasian Economic Union took place in Astana at the end of May.

On May 23-24, I had a chance to participate in the Forum of Russia's and China's Leading Economists which was hosted by the St. Petersburg State University of Economics. By a happy coincidence, the Forum took place right after the conclusion of the millennium gas deal between the two countries and, moreover, contemporaneously with the St. Petersburg International Economic Forum. Though our event was a much more modest one, all the participants felt their involvement with mainstream geopolitical developments. The atmosphere was very vibrant, friendly and a sort of triumphant. In fact, we felt ourselves as if we were participating in the St. Petersburg International Economic Forum since the agenda of both forums were somehow overlapping, including a key topic of the Russian-Chinese strategic economic partnership. 

 

It is needless to say that the gas deal was on everyone's lips. I was pleasantly surprised that the attitude of the Chinese speakers was very similar to my own vision. It is clear that the scientific communities of both countries are more free to express their views than the political leadership. Recently, Russian policymakers do not hesitate to express their opinions in strong and sarcastic terms and the general public enjoy this fact. On the other hand, the Chinese leadership is rather careful in its wording and expresses its position rather indirectly. On the contrary, the Chinese speakers at our Forum were even more tough while expressing their attitudes towards the U.S. policy than their Russian counterparts. They accused the U.S. of the “new regionalism” aimed at excluding China and Russia from shaping new international trade rules in the framework of Trans-Pacific Partnership Agreement (TPP) and Transatlantic Trade and Investment Partnership (TTIP). Both Russian and Chinese participants agreed that the US domination destabilizes the world and exerts direct threats to national security of our countries. 

 

In my presentation, I presumed that Russia and China should give asymmetric geoeconomic responses to the latest geopolitical threats, avoiding direct confrontation. Since the U.S. is still stronger economically, politically and militarily than China and Russia and, mainly, because all three countries are the members of the nuke club and the world is already dangerously balancing on the brink of the world war. 

 

In my opinion, soft asymmetric responses should not be directed straightforward at a potential adversary but represent elaborate strategies aimed at creating international configurations or alternative ways out of a crisis situation. In these latter days, Russia has been masterminding such kind of long-term solutions. Instead of involving itself in a fruitless tit for tat sanctions game, Russia has been forging its Asian-Pacific pivot. 

 

Ahead of striking the mega-gas deal and in the aftermath, there was no shortage of speculations about its geopolitical significance. A repeating key-note was that China had an upper hand because of Western sanctions against Russia. The commentators presumed that Putin was going to China as a suppliant and would be forced to submit to Chinese tough conditions. Frankly speaking, I was seriously concerned when at the end of the first day of his visit the contract wasn't yet signed and I saw Putin's sober face. The tension continued on the next day and only in the afternoon it was announced that the deal was struck. However, there was still remaining a sort of ambiguity about the price of the gas that could serve as the main indicator of whose hand was the upper one. Gazprom regards the price as a commercial secret and didnn't reveal it. So the analytical community both in the West and in Russia made a lot of guesswork. A simple math supposes that if the total price ($400 billion) and the quantity (38 billion cubic meters) are known then the average price can be $350 per 1,000 cubic meters. 

The Western commentators hurried up to admit that “Given the costs announced so far, this project will yield a subpar return for Gazprom under today’s assumptions—maybe high single digits or low double digits. This will not be Gazprom’s most profitable endeavor”. However, the head of the Gazprom export arm Alexander Medvedev said the gas price would be well above $350 per 1,000 cubic meters. At that, Gazprom and China have preliminary agreed on a $25 billion advance payment for gas supplies. Konstantin Simonov, director general of the National Energy Security Foundation, thinks that the widely reported sticker price of $350 per 1,000 cubic meters is a simple oversimplification. He explained that under the contract, supplies of Russian gas via the Eastern route will reach the full capacity of 38 bcm a year only after the fifth year of supplies. During the first five years deliveries will be only 16 bcm annually. This means that the total gas supply will exceed a trillion cubic meters and the price will come closer to $390.  

Important for Russia, the agreement includes a base price formula with reference to oil prices. Russia was determined to protect this price formula notwithstanding China's tough resistance. The pricing of Russia's gas sales to Europe is based on an oil price reference formula. Given the high oil prices, the oil-based price formula for natural gas allows Russia to sell its gas at a higher price than if it were based on spot-market natural gas prices. On the other hand, RBC Capital Markets analysts said implied terms will give China a steady supply of piped-in Russian gas at a price about 25-40 percent lower than the current cost of importing liquefied natural gas from overseas. So the deal is beneficial for both parties.

Gazprom expects that the contract with China will affect gas prices in the European market, Aleksey Miller, head of Gazprom said at the St. Petersburg International Economic Forum. "Firstly we assume that the signing of this contract will impact European gas prices. Secondly, the competition for Russian gas resources has begun yesterday,” Miller said. “The Asia-Pacific is not only the largest and dominant market, but it is the Asia-Pacific market that is influencing the European and North American markets”.

A greater geopolitical vision of the gas deal is expressed by Ulson Gunnar, “Finally, Russia and China’s constructive energy partnership, concluded without territorial, economic, or legal integration, will lend further credibility toward a future multipolar global order, while simultaneously exposing the shortcomings, even follies, of the West’s unipolar system of pursuing hegemony through costly and ultimately unsustainable global integration».

Immediately after striking the deal which was long in advance nicknamed by the Western media as Putin's Holy Graal, it was labeled as Russia's Asian pivot. As Patrick L Young puts it, “Placed in perspective, while a massive deal it is only expected to be around 10 percent of Chinese demand by 2020 (according to Nomura). That means there is much more scope for Russia to increase its supply in due course. Russia’s pivot to the growing markets of the east is in full swing”.

Properly speaking, inking a gas deal wasn't the beginning but a spectacular display of a very careful and thoroughly adjusted process of Russia's return to the Pacific. The deal was just an ultimate piece of smalt which made the whole mosaic visible to the general public. In fact, the Western analytical community has been alerting their governments about potential Russia's shift to the East long ahead of the Ukrainian crisis and even before Putin's re-election.

Gazprom and CNPC had been negotiating the gas deal during a whole decade, and when it was finally finalized Russia has succeeded in concluding a bulk of trade agreements with other north-eastern states. As well. Another landmark project is to double connect North and South Koreas by means of pipelines and railways. On June 5, Russia’s Minister for Far East Development Aleksander Galushka announced the plan to extend the Trans-Siberian Railroad in order to provide a link between the Korean peninsula and Europe. The link will extend the world’s longest railroad and make Russia a major transit route between Europe and Asia. Shipping by rail is nearly 3 times faster than via the Suez Canal, Russian Railways CEO Vladimir Bakunin said.

Cooperation between the two Koreas on the railway could lead to compromise on a long-delayed plan to build gas pipelines and connect both Koreas with Russian gas. Russia's Gazprom and the DPRK's Ministry of Energy have reached an understanding to build a natural gas pipeline that would enter the DPRK at the Khasan crossing of the Tumen River on the Russia-DPRK border. The pipeline would then extend through the DPRK to the Republic of Korea (Korean Gas Co). South Korea is the 10th largest consumer of energy worldwide and the second largest importer of LNG. Russia first agreed to export LNG to South Korea in 2005, and agreements this year include South Korean support for modernizing the LNG fleet and investing in Russian Far East development. Seoul is especially interested in partnering with Russia as an alternative to nearby China and Japan. Russia is ideally positioned to export to South Korea because of the proximity of the two.

In order to boost the deals, Vladimir Putin recently signed into law an agreement that will write off much of DPRK Soviet-era loans. Russia will forgive 90 percent of North Korea’s debt from the Soviet era, leaving $1 billion to be repaid interest free in the next 20-40 years. At that, North Korea will grant Russian firms access to its natural resources in exchange for imports and investments. In January, a UK-based private equity firm SRE Minerals Limited said North Korea had the largest rare earth oxides deposits in the world, an amount of approximately 216 million tons. Rare earth elements (REE) can be used in many sophisticated technologies, from cell phones to guided missiles.

During his four-day visit to Vietnam and South Korea in November 2013, Putin signed a series of documents to enhance Russia's cooperation with Hanoi and Seoul in the economic, energy, military and humanitarian sectors. Thus, Russia will help Vietnam with hydrocarbon extraction, and possibly sell LNG to Vietnam, along with its ongoing support for the Vietnamese navy and nuclear power. Vietnam’s coast is accessible from ports in Russia’s Far East. For that reason, Russia sees Vietnam as an attractive energy partner not only in its own right but also as a gateway for Russian exports to other Southeast Asian nations. Using Vietnam as a corridor to Southeast Asia would allow Russia to diversify its energy trade and avoid excessive dependance on Chinese exports.

India is an ancient trade partner and loyal political ally which has openly supported Russia amidst the Ukraine crisis. The countries are involved in high-tech military cooperation and Russia is a top arms provider to India. Surprisingly enough, their energy cooperation has got a random character. One of the major barriers to greater energy partnership between India and Russia — particularly for crude oil — is the lack of infrastructure to transport the crude. Currently, Russia and India are negotiating the construction of a $30 billion oil pipeline—the most expensive ever—to connect Russia’s Altai mountain region to the Xinjiang province in northwest China and then to northern India. India also can be interested in buying LNG from Gazprom's Sakhalin-2 terminal. At the time being, the main beneficiary of Sakhalin-2 is Japan. A new LNG plant in Vladivostok aims to ship 10 million tons from 2018 and will be connected to the continental gas production centres such as Yakutia and Irkutsk oblast. Novatek, Russia’s largest non-state gas producer, initiated another LNG Project on Yamal peninsula. It will start producing LNG in 2016 and supply 16.5 million tons per year of the tanker-shipped fuel by 2018.

 

Naturally, Russia's beginning pivot to Asia was not at all welcome in the West. Gal Luft in a characteristic article “Can America Stop Russia's Energy "Pivot" To Asia?” gives the US leadership advises how to stop Russia. They are so outdated that I can't deprive myself of pleasure to cite them. 1) “as guarantor of South Korean security, Washington should publicly take a strong position against the Russia-Korea pipeline”. 2) “Washington should convince its Asian allies that it is committed to becoming a leading energy-exporting country and a major player in the global energy-trade system”. 3) the U.S. “should enhance cooperation with Asia on unconventional gas. China owns the world’s largest shale reserve. Japan is a global leader in the development of methane hydrates”. 4) the U.S. “should support measures aimed at reducing LNG prices in the Asia-Pacific to make LNG more competitive with Russian pipeline gas”. In fact, items 2-4 can be reduced to a single one or shale, shale and shale! 

The U.S. made all this mess in the Ukraine in order to promote its shale gas to the EU and, supposedly, to extract it in the eastern Ukraine. That is why the US military advisers are so relentless towards the rebellious eastern provinces. It's hard to believe that they offer to sell the futures of this same gas not only to Europe but to Asia as well. In Russia, we say “to sell the bear's skin before one has caught the bear”. In my previous post I cited Gail Tverberg's article “The Absurdity of US Natural Gas Exports” , were she explains why America's gas crusade to Europe is ill-intentioned not only against Russia but for Europe, as well. On June 5 after the G7 meeting in Brussels, European Commission President José Manuel Barroso made it clear that the EU cannot create “the illusion that gas from the US is going to solve our problems.” In fact, instead of containing Russia's pivot, the U.S. and the EU have been doing their best to push it forward. A ridiculous sanction's campaign is still in play. The latest EU suicide attempt was to cancel the construction of the South Stream pipeline bypassing Ukraine. 

During the last few years, Russia has been striving to strengthen the European energy security and to diminish dependency of Southern European markets from the vicissitudes of gas transit through the unstable Ukraine. According to its fuzzy logic, the European Commission told Bulgaria to suspend preparatory work on South Stream, as it could damage EU energy security. Ironically, all this fuss takes place right at the moment when the EU, Russia and Ukraine are trying hard to resolve a $3.5 bn debt crisis since Ukraine haven't paid for Russian gas for months. Putin has sent two letters to EU leaders warning them that in case of continuing non-payments, Gazprom would be forced to suspend deliveries to Ukraine. A recent history teaches us that in such a case the latter simply begin stealing gas from a transit pipe. After tough talks, Ukraine has paid a third of the debt. What makes me laugh - that same EU Energy Commissioner Guenther Oettinger who has been the main arbiter in the debt case, has announced about blocking the South Stream. After trilateral gas talks in Brussels, Gazprom Chairman Miller has stated, “The EC cannot stop the construction. No one can stop us building it. Our answer is very simple. In December 2015 the first gas along the marine section under the Black Sea will arrive in Bulgaria and the European Union”.

Credit: Pool photo by Alexey Druginyn

While the West understands that it cannot reverse Russia's shift to the East, it is deeply concerned by another Putin's “dream” which has been turning into reality these days. After the collapse of the USSR, Russia has been seeking to restore gradually the economic and political relations in the post-Soviet territory in the framework of the Eurasian Economic Union and the Customs Union. At the end of 2011, Vladimir Putin, then being the Russia's Prime Minister, published an article "A new integration project for Eurasia: The future in the making" ("Izvestia", 3 October 2011). He revealed his vision of further developing of the Eurasion cooperation. An angry reaction from the other side of the Atlantic was not long in coming. Former US Secretary of State Hillary Clinton referred to the project as a “move to re-Sovietise the region.” While acknowledging that the Eurasian Union will not be called “the Soviet Union,” she also stressed “let’s make no mistake about it. We know what the goal is and we are trying to figure out effective ways to slow down or prevent it”. Did her ominous threat ever come true? 

 

On May 29, Presidents of Russia, Belarus and Kazakhstan has signed the Treaty on the Creation of the Eurasian Economic Union in Astana, which comes into effect in January 2015. The goal is to create a common market between three countries with a total population of over 170 million, with free movement of capital, goods, services and labour. Kyrgyzstan and Armenia are ready to join the Treaty in the nearest future. Meanwhile, Vietnam and Turkey are negotiating about joining the Customs Union. After the signing ceremony, President of Kazakhstan Nursultan Nazarbayev who hosted the event, said “a new 21st century geopolitical reality is being born”. 

It isn't at all surprising that comments on establishing the Eurasian Economic Union, were rather aggressive. They labeled the EEC as a “New Russian Empire” or a “New Soviet Union.” They predicted its failure, mainly, because of Ukraine's absence. Neil MacFarquharmay wrote a post titled sarcastically “Russia and 2 Neighbors Form Economic Union That Has a Ukraine-Size Hole». He writes, “Some analysts suggest that the loss of Ukraine as a potential member was the death knell for the Eurasian Economic Union. On a purely economic scale, losing Ukraine meant losing a market of more than 40 million people. Ukraine also provided economic diversity when paired with the two energy exporters».

Is Ukraine so crucial for the Eurasian project? In order to understand the rationale behind Western reaction on Ukrainian developments, let's turn to “The Grand Chessboard: American Primacy And Its Geostrategic Imperatives”, a textbook for American presidents written by Zbigniew Brzezinski. Four key statements are, as follows, 1) “For America, the chief geopolitical prize is Eurasia”, 2) “A power that dominates Eurasia would control two of the world's three most advanced and economically productive regions”. 3) “the new world order under the hegemony of the United States is created against Russia and on the fragments of Russia”. 4) “without Ukraine Russia ceases to be empire, while with Ukraine – bought off first and subdued afterwards, it automatically turns into empire”. Following these clear instructions, the U.S. leadership has started a campaign of tearing Ukraine away from Russia and incidentally selling the idea of shale gas.

In my opinion, Brzezinski and his adepts have been over-estimating Ukraine's significance for a success of the Eurasian integration. Though Ukraine is very emotionally important for Russians, from the political and economic points of view, it was clear long ago that it was drifting to the West. If we look at the chart, we can see that Ukraine didn't take part in the Customs Union and exited from the Common Economic Space on the early stage. Initially, Russia was not so strong economically in order to give the country considerable support or to compete with the US NGOs in bribing the local elite. When Russia began doing well and started investing in Ukraine, the latter corrupted and got accustomed to milk two cows. Meanwhile, a fatal West-East divide has been gradually corroding the country from within. While maintaining old cooperation relations with the east-Ukrainian industrial regions, Russia was developing little by little its own industries to substitute Ukrainian import. Finally, the construction of North and South Stream pipelines were aimed to decrease gas transit through Ukraine. However, Ukraine will always stay a source of political, security and humanitarian preoccupation for Russian leadership.

Source: http://epthinktank.eu

I can't respond better to those who talks about Putin's imperial ambitions, than Mark Adomanis, who says, «Without lapsing into cartoonish Kremlinology, I do think it’s noteworthy and important that Putin is so publicly and forcefully going on the record advancing a broad program of technocratic neoliberalism: harmonizing regulations, lowering barriers to trade, reducing tariffs, eliminating unnecessary border controls, driving efficiency, and generally fostering the free movement of people and goods. Even if not fully sincere, an embrace of these policies is healthy». 

Last but not least, an important by-product of the Asian pivot is further undermining dollar domination, since according to the gas megadeal and other Russian-Chinese deals roubles or yuans will be used in mutual payments. Trade turnover inside the EEC will be also carried out in roubles, as well as, North-Korean deals.