Putin Should Heed This Russian's Warning on Oil
Oil prices follow cycles, and so does the thinking about the future of oil-producing countries. This week, Russian billionaire Petr Aven and two Moscow economists published an article dissecting what they call the "twilight of the petrostate" which echoes the concerns of the Saudi Arabian elite -- but also the conventional thinking of the late 1990s, when oil was also cheap.
Aven's byline on the article is not to be taken lightly. He made almost $2 billion when Alfa Group, in which he is a shareholder, sold its share of oil company TNK BP to state-owned Rosneft in 2013. Aven was also Russia's foreign trade minister in 1992, when Vladimir Putin was in charge of foreign trade at the St. Petersburg mayor's office, so the two men know each other well. Aven knows a lot about at least one petrostate -- and not the least important one, either: Russia vies with Saudi Arabia for the title of the world's biggest oil producer.
The diagnosis and predictions from Aven and his co-authors are dire. They write that petrostates, from Russia to Venezuela, and from Kazakhstan to the Persian Gulf, have used their oil rent to enjoy Western-style consumption without subscribing to the Western values that made it possible. Now they are at risk of ending up like the producers of natural rubber after the invention of synthetic latex -- dependent on a commodity that no longer generates a rent because of its scarcity but just sells as a certain mark-up to production cost.
"The influence of the Petroleum Leviathan — the handful of producing countries with the ability to exercise a heavy influence on the price of oil — will fall victim to the invisible hand of the market, which increasingly is armed with new oil extraction, energy-saving technologies and non-petroleum solutions in transport, power generation and petrochemistry," they write.
This, say the authors, will require a political realignment, and even a geopolitical one. Latin America will swing to the right from its leftist populism, in the Middle East Saudi Arabia's influence will wane in favor of Turkey, Israel and Iran. (Iran actually had a non-oil trade surplus last year and is less of a pure petrostate than Saudi Arabia.) Iraq and Syria may fall apart. And globalization will never be the same again:
As trade, investment and migrant flows between oil-producing countries and the rest of the world decline, the body of globalism will certainly grow leaner. Its spirit, however, will revive. The full enjoyment of Western comforts and technologies will no longer be compatible with a negation of its values and institutes. Only those countries that embrace modernization and carry it further than they did in the previous oil downcycle can hope not be relegated to a historical footnote.
Coming as it does after Saudi Arabian Prince Mohammad bin Salman announced a reform plan aimed at making his country a non-oil-based economy by 2030, the Aven article appears to be another symptom of a deep disquiet in major oil producing nations. There's nothing new about that. Every time prices drop, sharp critiques appear of the corruption, inefficiency, cronyism and clientelism endemic to petrostates. In 1999, Terry Lynn Karl of Stanford University wrote:
Periods of low oil prices offer the best opportunity for constructing the political and administrative institutions capable of managing petroleum. Indeed, such periods may be the only opportunity to move petrostates from vicious development cycles to virtuous ones, because this requires that merit-based civil services replace cronyism and clientelistic arrangements, more political support can be built for civil service reforms when prices are low.
The difference is that during the previous downcycle, it was assumed that prices would rise again; the window of opportunity was brief. Today's rhetoric, whether it comes from Aven or Prince Mohammad, is of the doomsday kind: The general idea is that prices will never rise again.
It's easy to buy if you read a lot of news stories about Tesla and the technological breakthroughs of U.S. frackers, but harder if you get into the details of car battery technology, U.S. oil production or energy investment statistics. There is no evidence yet that the last oil boom is behind us. So far, the trajectory of oil demand has been an unmistakably upward one:
Unless a disruptive event -- like the invention of a cheap electric car battery that can go 400 miles, and not just on paper -- changes consumer habits, the trajectory will likely continue, especially in developing countries such as India, which now drives demand growth. The lack of investment in oil exploration and production in the last couple of years will eventually make oil scarcer again. The current mini-boom, which has brought the price of Brent crude to almost $50 per barrel from a low of about $28 in January, illustrates what may happen then.
Aven is not so down on oil as to get out of the business. Through their offshore vehicle LetterOne, Aven and his partners own Dea, the German oil and gas company, acquired just last year. Aven's personal stake in it, according to Bloomberg Billionaires, accounts for $811 million of his $5.2 billion fortune. The business may be doomed; but not quite yet, this suggests.
The article, however, is still important. Aven represents a small remaining group of relatively influential economic and political liberals who regret Russia's recent course away from the West. Aven's text never mentions Putin by name and makes only passing references to modern Russia, though it does recall at length the Soviet Union's oil dependence and its role in the country's demise. Yet it comes as Putin is about to hear from the drafters of two economic development plans -- one based on government investment and self-sufficiency, the other a more liberal one based on fiscal consolidation and structural reforms.
Aven's preference is clearly expressed in the article (a Russian version of which was published on the same day), but as the experienced courtier he is, he doesn't push: He just makes sure his dire warning is out there as an argument for shrinking the government and stimulating non-oil growth.
The rules of debate in Russia have changed significantly in recent years, but the debate itself hasn't quite ceased. Influential modernizers -- or, rather, Westernizers -- can still get their voices heard. Russia's future course depends on whether Putin is willing to listen, even just a little bit.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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