AuthorTopic: The Great Oil Game: Resource Crisis in Russia?  (Read 634 times)

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The Great Oil Game: Resource Crisis in Russia?
« on: May 04, 2015, 12:46:18 PM »


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Published on Resource Crisis on May 3, 2015



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


 



 



 



 




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



 






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



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



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

 






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



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



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



 



 



 









Offline Palloy

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Re: The Great Oil Game: Resource Crisis in Russia?
« Reply #1 on: May 05, 2015, 10:21:59 PM »
A few very odd things in there.

> "Nobody predicted the collapse of the Soviet Union" - since the unravelling took over 5 years (1986-91), it must have been obvious at some point before December 26, 1991 that it was going to happen.  And it was only partly to do with the price oil.  The cost of keeping up in the arms race, and the lack of access to capital markets to subsidise it, that was its undoing.  Reagan ran the US economy into the ground to keep on pushing on - and now we just await the debt bubble implosion.

> "Today, there is no equivalent of the new resources that had entered in production in the 1980s" - huh?  Apart from the expensive tight oil, you mean, all subsidised with debt.



> "as long as oil prices do not fall below US 40 $, Russia should be able to survive" - all the others apart from the Middle East will be long gone before Russia has to stop, as your own chart demonstrates.

> "if you google for "ASPO Russia" you'll find the Astrakhan Shipbuilding Production Association"
Actually, if you Google "ASPO Russia" this article on DD comes out one place ahead of Astrakhan Shipbuilding Production Association, but since there is no ASPO-Russia that's hardly surprising.  Instead, go to yandex.com, not Google, and search for [russia "resource depletion"] and there you go.
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Offline MKing

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Re: The Great Oil Game: Resource Crisis in Russia?
« Reply #2 on: May 06, 2015, 08:34:39 AM »
Hubbert knew about tight oil and gas in 1956. It was even included in his oil production rates because those rates included the shale oil production that had begun developing back in the 1860's in Ohio. He specifically graphed that production and it is Figure 12 in his seminal 1956 work. Assuming folks have an interest, and if they do, they should know that Ohio reversed its production decline and nearly re-peaked itself around 1980. It currently is the best example of an area re-peaking nearly a century after another peak. Quite an error bar.

And when Hubbert was predicting US peak oil by 1950, he wasn't quantifying his answer near as well. But at least he saw fit to kick the can far enough down the road to get his 2 scenarios in range. Possibly repacked in 2014, depending on what the final numbers look like for the year from the EIA. So 40+ years after Hubbert's last decent peak prediction, that one might bite the dust as well.

Also, you don't appear to be making any mention of what steady demand growth looks like in a steady state price environment, itself causing this profile that has generated such interest over the years. For example, here is how well this type of profile works when it isn't in a steady demand increase and steady price environment, using natural gas in the US as an example.

Sometimes one creates a dynamic impression by saying something, and sometimes one creates as significant an impression by remaining silent.
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