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A Russian Energy Reality

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
December 27th, 2014

Russia is not some Zimbabwe-to-be. It's sitting on a surplus of foreign assets and very healthy foreign exchange reserves of around $375 billion. Moreover, it has a strong debt-to-GDP ratio of just 13% and a large (and steadily growing) stockpile of gold. This is why Russia will arrest the ruble's slide and keep pumping oil.

-Marin Katusa (Chief investment strategist for Casey Energy Investment (2014).)

You got that right Dr Katusa, and I hope that our friends and neighbors control their rage when they read it, because it is just what many of our finest citizens do not want to hear. 'As right as the rain' - as it says in the opening line of the song from the brilliant American musical Bloomer Girl (1944) - although the former scholar from the Stockholm School of Economics, Professor Anders Aslund, tells us to think of Russia as though Joseph Stalin (aka Bob Steele to some of the disco crowd during my post-grad days in Stockholm) was still giving the orders, and the Russian economy was still grossly mismanaged and would soon disappear down the tube.

But I want to go further than Dr Katusa, because he touched on the key point in his short and important article. "Putin always thinks decades ahead!" was the way he put it. I consider it a good idea if readers of this contribution understand the meaning and value of this behavior.

In my book Scarcity, Energy and Economic Progress (1977), I say early on that population growth is going to be a major issue in the not too distant future, and the time to do something about it was NOW (meaning THEN). Understandably, that contention didn't go over so good, and so I only mentioned it en-passant in my later books and lectures. You see, in every society there are a number of inveterate gamblers and dreamers, and some of those players believe that huge populations will be good for their bank accounts and/or their 'intimate lives'.

To my great surprise and disgust, I was made aware of those predilections the second day I was in Sweden. More alarming, various ladies and gentlemen cherishing that silly belief succeeded in bequeathing it to later Swedish voters and governments, and the same is true in many other countries. As a result our decision makers have lost or are losing control of the population situation. They are losing control and they know it, and so when that topic is introduced they inevitably react with lies and misunderstandings instead of intelligence.

Although I haven't made it clear yet to the colleagues and students, I intend to continue believing that simple jealousy is one of the reasons for the anti-Russian nonsense that we have to put up with now, some of which (as with natural gas) is obviously counterproductive. Jealousy because Russia will not have to deal with the curse of limited natural resources and excessive populations in the foreseeable future. In the book mentioned above, and especially my book on oil (1980), I claimed that Russia is the richest country in the world, by which I meant that they have everything to work with if they get and keep their economic act together, and as icing on the cake they in the unique position of being able to ignore the demographic headwinds.

Thirty years ago I had the same belief about Canada until I attended a lecture in Australia in which a Canadian bureaucrat assured her audience that everything possible was being done to increase the immigration into her country. But maybe, like Russia and Australia, the numbers are still in Canada's favor…for a while at least. I certainly hope so, because they aren't in the favor of the United States of America.

"Everything to work with if they can get their act together", which is now happening. Consider this example. Russia has comprehensive military service, but there tend to be exclusions for young men in schools and important professions. Therefore, according to many of the military people in that country with the large hats but small brains, the wrong people are being drafted. Their claim is that the army is getting the heavy drinkers and drug users, while the good boys sit in front of computers and study math.

There was a small but enthusiastic collection of heavy drinkers and drug users in the infantry battalion I served with in Kobe (Japan) shortly before the Korean war. The army straightened many of them out, and although it is not widely known, this is one of the purposes of conscription (or national service) in Russia. It's not to fight a war near the shores of the Baltic, or on the eastern border of the Ukraine. It's purpose is to help improve Russian human capital, although this is not widely advertised!

The talk these days is about Russian oil. Russia has more than enough oil, and as I pointed out in my oil book, both theory and evidence indicates that oil in the ground is like money in a bank: it has a greater value with every passing year. Moreover, together with the American firm Exxon Mobil, a huge oil deposit was recently discovered in Arctic waters relatively close to Russia.

For some ignorant reason Exxon has been forbidden to work with Russians again, but Mr Putin doesn't care. Why should he? As he and his friends point out, that kind of prohibition generally makes Russia stronger, because it means that in the future they will have to learn how to do without foreign help, and the oil they are certain to find will not have to be shared with anyone. You might also have heard that China and Russia boast the largest shale resources in the world, and sooner or later their optimal exploitation will be possible. Unlike China, Russia has no need to hurry.

Incidentally, I don't concern myself with Russian oil any longer. For me the Russian agricultural sector is the item to watch, and I must unfortunately report to Professor Aslund and his colleagues at the Peterson Institute that prospects for that sector couldn't be better, thanks to the cooperation that has taken place with North American and other foreign technicians and experts, and will eventually be expanded. I should also note that the expression 'food insecurity', which at the present time may apply to a sixth of American residents (according to a recent article in National Geographic). will soon be history in Russia. On the other hand it is unfortunate that those Russians who want to ski (and party) at wonderful Courchevel (in France) or Are (in Sweden) will have to demonstrate their skill on domestic slopes, but remembering the magnificent panoramas served up for the 2014 winter Olympics in Sochi, that can't be too much of a disappointment.

One more point. In my oil book I criticize the CIA for believing that Russia would soon be an importer rather than an exporter of oil. I don't believe that they make mistakes of that nature any longer, and so I am sure that they not only know that the arguments above are accurate, but know it better than I do.

REFERENCES

Banks, Ferdinand E. (2015). Energy and Economic Theory. London, New York and Singapore: World Scientific. (Forthcoming)

_____. (2008).'The sum of many hopes and fears about the energy resources of the Middle East'. Lecture given at the Ecole Normale Superieure (Paris), May 20.

_____. (1980). The Political Economy of Oil. Lexington (Massachusetts) and Toronto: D.C. Heath and Company.

Katusha, Marin (2014), 'Why Russia will halt the ruble's slide and keep pumping oil.' 321 Energy (December 20th).

Aslund, Anders (2014). 'Ryssland sviktar under tunga slag'. Svenska Dagbladet' (21 December)

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
December 27th, 2014