Tue, Jun 21, 2016 - Page 9 News List

Russia’s failure to address post-oil era would see economy stall

By Vitaly Kazakov

It is difficult to overstate the importance of the oil industry to the Russian economy. Globally, Russia is competitive in defense products, space launches, nuclear power, mineral resources and information technology. However, none of these industries compare to oil and gas exports. To the average Russian, the nation’s economy seems to be structured around exchanging barrels of oil for cars and smartphones. The trouble, of course, is that as oil prices have plunged, those barrels buy ever fewer imports.

Oil revenues, as with revenues from most commodities, are cyclical and sudden drops are not unusual. However, it would be a mistake for nations like Russia to assume that prices are to rise again. A recent drop in prices is indicative of an unprecedented structural change in the energy sector — one that is to have significant political implications for oil-producing nations.

During the 20th century, oil was a limited resource; its price, it seemed, could only go up. As easily accessible oil was exhausted, extracting from new, ever more marginal sources became progressively more expensive. As prices rose, the lucky owners of low-cost oil and gas fields — notably Russia and producers in the Middle East — were able to capture increasingly large margins.

However, as is often the case, high prices and human creativity combined to provide alternatives to a limited commodity. The energy industry has seen technological breakthroughs originating both within the industry, such as the shale-oil revolution in the US, and outside of it in the form of cheap, renewable energy.

In the most favorable locations, wind power and solar power can cost as little as US$0.03 per kilowatt-hour, while “green” consumer goods are becoming ever more competitive. In March, for example, the fully electric Tesla Model 3 was unveiled and priced at a relatively reasonable US$35,000. Within a month, preorders exceeded US$14 billion, making it the most successful product launch in history.

As new sources of energy become increasingly competitive as well, the oil industry’s price dynamics are set for a fundamental shift. Energy production is no longer to be tied to a scarce, ever more expensive resource; on the contrary, as with other technology industries, prices are likely to continue to drop.

This technological revolution is likely to have serious political implications. For much of the 20th century, developing nations had two paths for economic success. One was to adopt the principles of Western capitalism, allow foreign capital to flow in and exploit the comparative advantage of cheap local labor resources to find a niche in the emerging globalized economy. The other path was to discover and develop abundant petroleum resources, sit at the bottleneck of booming global economic growth and extract the available rents.

The petroleum industry’s economic characteristics have shaped the political landscape in oil-producing nations. Governments in regions blessed with cheap oil have sometimes considered the resulting revenues as a sign of divine favor and spent money as if it would never run out.

Some people, such as former Saudi Arabian minister of petroleum and mineral resources Ahmed Zaki Yamani, said that this approach was not sustainable.

“Thirty years from now, there will be a huge amount of oil — and no buyers,” Yamani said in 2000. “The Stone Age came to an end not for lack of stone, and the ‘oil age’ will end long before we run out of oil.”

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