Resource wars and the current geopolitical unrest as seen from Russia. A speech from Tatiana Yugay at the 1st Summer Academy of the Club of Rome in Florence

Professor Tatiana Yugay of Plekhanov University in Moscow speaks at the first summer academy of the Club of Rome in Florence. 

The Summer Academy of the Club of Rome is in full swing in Florence. Many things are being discussed and I'll see to present a summary of the main points in future posts. Here, I think I can already start with the presentation by professor Tatiana Yugay who brought to the school a voice from outside the Western World. Professor Yugay is an expert in geopolitical issues and, in particular, she works on questions related to oil and gas. Her thesis at the meeting was that much of the current world unrest can be seen as the result of the ongoing wars for mineral resources which are becoming scarce. She also noted that this situation may be one of the main causes for the rising inequality trends almost everywhere in the world.

In the following, an example of prof. Yugay's work in this field.

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This is an abridged version of a review of Douglas Reynolds' book "Cold War Energy" by Tatiana Yugay and Ugo Bardi published on Energy Research & Social Science, Volume 34, December 2017, Pages 200-201. For the complete text, write me (ugo.bardi(thingything)unifi.it).

Book Review

Cold War Energy. The Rise and Fall of the Soviet Union, D. Reynolds. Alaska Chena LLC, Alaska (2016).

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https://doi.org/10.1016/j.erss.2017.07.011t

The fall of empires is a much-studied subject, but also one where an agreement on the cause (or causes) of the fall seems to be extremely difficult to find. For, instance, in the case of the Roman Empire, Demandt [1] describes some 210 theories on why Rome fell, and this is probably an incomplete list. Overall, however, we can divide this domain into two main subsets: theories based on several independent causes acting together (concauses) and theories based on a single cause that generates a cascade of different effects. An example of the first approach – many concauses – is the recent study by Cline on the Bronze Age Civilization [2]. The other approach is probably best represented by John Tainter’s study “The Collapse of Complex Societies” [3] where he identifies a general factor in the decline and fall of civilizations and empires as the “diminishing returns of complexity.”

Douglas Reynolds’ book, “Cold War Energy” examines the most recent case of the fall of a large empire, that of the Soviet Union. It does so falling straight into the camp of the proponents of “single cause collapse.” In this case, Reynolds identifies this cause as the peak of oil production in the Soviet Union, in turn related to the increasing costs of production generated by progressive depletion. 

With some exceptions [4] Reynolds’ interpretation is clearly minoritary. In Russia, today, the prevalent opinion seems to be that the Union’s fall was due to the mistakes, or the outright betrayal, of the secretary of the Soviet Communist Party, Mikhail Gorbachev. In the West, a commonly reported opinion is that the fall of the Soviet Union was the result of a secret agreement between the leaders of the US, UK, and Saudi Arabia. The Saudis agreed to flood the market with cheap petroleum and this caused a loss of revenues for the Soviet Union that depended on petroleum exports for its economy. In general, the most common interpretations focus on shortcomings of the Soviet economic system, namely the lack of the incentives produced by the free market that prevented the Union from attaining the same efficiency of the West in resource exploitation.

Reynolds’ interpretation, instead, is original and interesting since it turns completely around the way the subject is normally discussed. Reynolds focuses on the Union’s strengths, rather than its shortcomings. Reynolds makes the bold step of trying to look for similarities – rather than for differences – between the Soviet Bloc and the Western Bloc. 

Reynolds’ analysis leads us to follow the trajectories of the two superpowers of the 20th century, the USA and the USSR. Reynolds uses the modern concept of energy return on investment (EROI) to show that both countries faced increasing costs of extraction for the vital resource that was crude oil. Neither was able to allocate sufficient capital resources to continue the growing production trend and both went through a production peak. Reynolds makes a strong case for peak oil being a major factor in the collapse of the Soviet Union and he also notes the relevance that this interpretation may have on our modern globalized world which is facing a global peak in the oil production, right in this period. The ongoing social and political turmoil, notes Reynolds, can be seen as similar to the events that brought down the Soviet Union. 

A weak point of the book is that it remains strongly focused on the Soviet Union but doesn’t make an in-depth comparison with how the peaking phenomenon played out in other regions of the world. There are other cases of states that collapsed or went into economic crisis and political turmoil in correspondence with their productive peak: one is Iran, which peaked around 1975, shortly thereafter experiencing the collapse of the ruling Pahlavi dynasty. Other, more recent, cases of peaking followed by turmoil are those of Egypt, Yemen, and Syria. None of these cases are discussed in the book, although an extensive comparison is made with the case of the United States, whose oil production peaked in 1970. Also here, however, we lack an explicit explanation of why the peaking of the internal energy production had such different effects on these two large producing regions. If peak oil is the underlying factor of the collapse of complex societies, why are we talking about the “Former Soviet Union” and not of the “Former United States of America?” (even though the latter term might become useful in a non-remote future).

Reynolds is very passionate about his peak oil hypothesis as the cause of the Soviet collapse that, helps him to further develop and enrich the macroeconomic analysis. On the other hand, we should all be wary of the old saying that goes as ‘when all you have is a hammer, everything looks like a nail'. It is valid for peak oil as well.

The "Syrian Sickness": what crude oil gives, crude oil will take away.

Here, I argue that the origins of the Syrian collapse are to be found in the economic downturn generated by the gradual depletion of the Syrian oil reserves. Crude oil had created modern Syria, crude oil has destroyed it. This phenomenon can be termed the "Syrian Sickness" and the question is: "which country will be affected next?"

Crude oil is a great source of wealth for the countries that possess it. But it is also a wealth that comes as a cycle. Normally, the cycle spans several decades, even more than a century, so that those who live through it may completely miss the fact that they are heading to an end of their wealth. But the cycle is faster and especially visible in those areas where the amount of oil is modest; there, wealth and misery appear one after the other in a dramatic series of events.

One of these rapid cycles of growth and decline is that of Syria. It is a country that never became a major world producer, its maximum output was less than 1% of the world's total production when it peaked, around 1995. (graph below, from Gail Tverberg's blog). For the small Syrian economy, however, even this limited amount was important.

The Syrian oil production went through its cycle over little more than three decades. Depletion generated progressively higher production costs and that led to a scarcity of capital investments to keep production increasing, eventually forcing it to decline. The result was the "bell shaped" production curve that is often called the "Hubbert curve". Around 2011, the internal consumption curve crossed the production curve and that transformed the country from an oil exporter to an oil importer. The cross-over point corresponded to the start of the civil war.

The IMF data show that the Syrian government's budget was still 25% dependent on oil in 2010. Data on what it was earlier on are hard to find, but it is clear that it must have been much larger. It may well be that, at the time of the peak, most of the government's revenues came from oil. Seen in this light, it is not surprising that the complete loss of these revenues generated a big turmoil.

So, we can build up a narrative of what happened in Syria after the peak. With progressively lower oil revenues, the government was less and less able to afford the bureaucracy and the social services it used to provide. Gradually, it became also unable to afford an efficient police force and a functioning army. The middle class, that had been strongly dependent on the government's handouts, was badly hit. The most educated and wealthy ones left the country or, at least, moved their financial assets abroad. Those who were forced to remain saw their assets destroyed by hyperinflation and became an impoverished urban proletariat. At the same time, the countryside also went through an economic disaster, enhanced by the droughts created by climate change. At this point, a large number of young men, unemployed and without hope for the future, become cannon fodder for religious fanatics and for local warlords, often paid by foreign powers interested in carving out the country in pieces to be distributed among themselves. The destruction of whatever was left was also helped by economic sanction and aerial bombardments. The final result is what we see: the "Syrian Sickness." A nearly terminal form of social sickness; it is hard to imagine when and how Syria will be able to recover even a shade of its former wealth and stability.

The factors that led to the Syrian disaster are by no means limited to Syria alone. Yemen went through a nearly identical cycle; going through the peak its oil production in 2002 at levels smaller than those of Syria, but probably even more important for the local economy. The cross-over point of the production and consumption curves took place in 2013 and, like Syria, the country is at present being destroyed by civil war and aerial bombardments.  (image from "crudeoilpeak")

There are several other examples of minor oil producers that went through similar cycles. Egypt, for instance, experienced the cross-over of production and consumption in 2010, experiencing a phase of dramatic civil unrest. Egypt, however, did not collapse; most likely because the importance of oil in its economy was not as large as it was for Syria. Other examples of countries that experienced the cross-over are Malaysia and Indonesia, also undergoing internal troubles, but no generalized collapse. No country is completely immune to the Syrian sickness, but some are less sensitive to it. So, some oil producers, such as the United Kingdom went through the cross-over point without suffering evident disasters; but the dependency of the UK government on crude oil was only 2% in 2011.

At this point, the question is obvious: given the known cases of Syrian Sickness, given that depletion is unavoidable, which country is next in line?

There are several candidates for a future crossover of production and consumption, but none seems to be very close to it. Venezuela, Iran, and Mexico may be the producers most at risk; but the critical moment may still be several years away in the future. But the most interesting and worrisome case is that of Saudi Arabia. The data shown below are from Mazamascience. Most producers of the Arabian peninsula (with the exception of Yemen) show a similar pattern.

You see that, despite the rapid increase in internal consumption, Saudi Arabia is still able to export about two thirds of its production. But how about the future? Of course, extrapolations are always dangerous, but it doesn't seem that the production and consumption curves are destined to cross each other very soon. Hence, the country might still have at least a couple of decades of substantial oil export revenues. The problem is that the Saudi economy is heavily dependent on oil: 90% of the government revenues come from oil. So, Saudi Arabia may not need to go through the cross-over point to start experiencing troubles. Consider that it is nearly completely dependent on imports for the food its population consumes, and that the trend is worsening because of the depletion of local aquifers. You can imagine what the problem could become in case of a substantial loss of financial resources coming from crude oil. If Saudi Arabia starts suffering of the Syrian Sickness, the result disaster may make the Syrian collapse look like a children's game.

Is there any hope for Saudi Arabia or any other producing country to avoid the Syrian Sickness? There are several ways to postpone or reverse the decline of oil production if sufficient financial resources are available. However, these are just stopgap measures: depletion is an irreversible process. A country can only prepare for it by building an alternative economic infrastructure while it is still possible; an opportunity that was missed in Syria. Today, Saudi Arabia doesn't lack the financial resource for massive investments in renewable energy, that would provide an alternative to the collapse created by depletion. Unfortunately, it doesn't appear that these investments are being made, with the Saudi government preferring to engage in expensive military power games. That's a bad idea not only for Saudi Arabia, but for the whole world: with more than 10% of the world's oil consumption provided by producers in the Arabian Peninsula, you can imagine what might happen if the region falls victim of the Syrian Sickness.

Crude oil has given a lot to Saudi Arabia, crude oil can take back a lot from it. But there is something that crude oil can never provide, and it is wisdom necessary to manage it well.