Russia’s energy wealth has long been the main pillar of the country’s economy, but what’s the long-term future of that financial security in a world that is gradually moving toward decarbonization? Thane Gustafson, whose Wheel of Fortune: The Battle for Oil and Power in Russia we recently released in a paperback edition, addressed that question earlier this fall when he delivered the Chatham House’s Annual Russia Lecture. The text of his address is below.
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The last time I had the honor of giving a speech here at Chatham House was thirteen years ago, in 2004. The talk was entitled “The Russian Oil Miracle.” Five years before, after sinking to a low point equal to about half of the Soviet-era record of 1988, Russian oil production had abruptly turned around, and between 1999 and 2004, it had regained much of the lost ground. During those years, Russia accounted for all of the net addition of crude to world oil supply.
What we could not see at the time, however, was that 2004 was the last of the miracle years, which were essentially based on capturing the “Soviet dividend.” By 2004 much of the Soviet dividend had been extracted, and while Russian oil production has continued to grow steadily since then, progress has been very gradual, and every year the net increase in production is far outstripped by the volume of drilling required to produce it, as each year’s production must overcome the built-in decline rate of existing fields as well as the diminishing returns from new ones. The Russian oil industry is very much in the position of an athlete that is running uphill against a slope that is steadily growing steeper.
But it is not my purpose today to deliver an update of the Russian Oil Miracle, but rather, to ask a very different sort of question, reflecting the revolutionary changes that have taken place in the world of energy, and especially in our perceptions of it, in just a decade-and-a-half, and to reflect with you on the implications of these changes for Russia as an energy producer and as—I think we can fairly use the term—a “petro-state.” Namely—what happens to Russia as an energy superpower as global demand for oil approaches a peak?
Cycles within Cycles: How to Think about the Energy Future of Russia
Trying to predict the future of Russian energy, and indeed of Russia itself, is like predicting climate change. And here I’m not talking about Mark Twain’s famous wisecrack that “everybody talks about the weather, but nobody does anything about it.” Rather, what I mean is the classic difficulty in any conversation about climate change—namely, that of distinguishing between long-term cycles and near-term ones, or, to put it another way, between signal and noise. Rising ocean levels are signal, whereas last year’s winter temperatures in Washington are noise.
Let me take as one example the cycles of global crude oil prices and their impact on the Russian economy. Russia has gone through four economic crashes since the mid-1980s, all four of them connected to the rise and fall of commodity prices and specifically oil. The precise causes and course of each of these cycles has been different from case to case. Yet the following would have seemed like a safe prediction just a few years ago:
- The cycle of peak and trough in global commodity prices will continue—that is what commodities do—and since oil markets are increasingly globalized and commoditized, the same cyclical pattern will govern oil prices as well—and gas too, by the way, as liquefied natural gas (LNG) increasingly turns gas into a globally traded commodity.
- And with each downturn—possibly at more frequent intervals in the future than in the past, but roughly once every decade—Russia will be thrown into recession, although with improved macroeconomic management (as in the last downturn) the extent of the decline may be cushioned. Conversely, as Alexei Kudrin has been warning for a decade, the stimulative effect of each upswing in oil prices will also be smaller each time, as the dependence of the Russian state budget on oil revenues increases.
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