Views on Russian Energy: Byron King / June 22, 2007

Professor Robert Levgold, who teaches at Columbia University, recently gave a talk in Washington DC to a group of energy-policy insiders.  The discussion summarized some of what is currently going on in the Russian energy sector.  Prof. Levgold is a noted scholar of the former Soviet Union, and on current affairs in Russia.

According to Prof. Levgold, Russia's economic recovery over the past five years is mainly due to capital flows from its energy exports.  The apparent political strength of President Putin is mainly a case of his boat rising with the economic tides.  As Bill Clinton once noted, “It's the economy, stupid.”

Yet, according to published statistics, Russia is consuming about half of its domestically-produced oil and gas.  If Russia could improve the energy efficiency of its own economy, it could raise its export earnings by close to 50%.  And there are some indications that the Russian economy could accommodate such a transformation. 

Although prices vary from region to region, it is apparent that energy use is heavily subsidized in Russia, such that Prof. Levgold estimates Russians pay about 20% of the world price for the energy that they consume.  So if Russia embarked on a program of eliminating subsidies, and allowing prices to rise to world market levels, Russian consumers and businesses would begin to alter their consumption patterns accordingly. 

This leads to some useful forms of speculation.  Begin with the fact that Russia has a relatively small fraction of world oil reserves, but a large fraction of world natural gas resources.  Some commentators call Russia the “the Saudi Arabia of natural gas.”  Yet Russia is also currently the world’s leading oil producer, extracting more than 10 million barrels per day.  Some Russian analysts forecast oil extraction rising to as much as 15 million barrels per day by 2015, but after that Russia can expect to see its oil numbers go into irreversible decline.  Thus Russia is a critical near-term factor in making up for oil depletion in other parts of the world, but even in the best of light Russia’s oil resources are a stop-gap that will allow some fortunate few customers to have access to oil while making an economic transition away from using that very oil. 

Russia’s oil-depletion problem is counter-balanced by its very large natural gas reserves. 

One possible energy scenario is for the Russians to embark on an aggressive program to convert natural gas to liquid fuel (gas-to-liquid, or GTL), with a focus on turning methane gas into liquid methanol for transport fuel.  If the still-nascent Russian market for automobiles would offer “flexible fuel” options to customers, particularly engines that can run on “gasoline-ethanol-methanol” (GEM) fuels, this would offer the potential to displace the use of gasoline from oil within Russia, and free up more oil for potential export. 

But Russia has its own structural economic problems, that even the income from energy sales abroad cannot solve.  Despite the great wealth that is flowing into Russia, there is still a cultural aversion to some forms of risk-taking, such that much of the wealth going to Russia comes back out and is used to purchase real estate in Western Europe, if not British football clubs. 

There are major problems in Russia with trying to build a sustainable, high-technology civilian economic infrastructure.

Most Russians apparently understand that they have traded one set of 1990s-era oil barons for another from this decade.  Russia’s vast oil and natural gas wealth may insulate that country from some of the immediate effects of Peak Oil for a decade or more beyond many other countries of the world.  But without changes in the underlying economic structure of production, it is unclear whether the Russians are making any real progress at all.

Note:  I am indebted to Paul Werbos of the U.S. National Science Foundation, who sent an email to me that prompted this line of thinking. — Byron King