Russia has a lot of problems, besides just not being able to finally defeat a much smaller neighbor with a fraction of Russia's resources. Russia's people aren't having babies. The nation is poised to fall off a demographic cliff; as the old saying goes, the future belongs to those who show up for it, and the Russian people seem to be opting out.
Now, under the former KGB apparatchik Vladimir Putin, Russia is forging some alarming alliances: with China, with Iran, and with North Korea. They are entering into trade deals with India. Russia has problems, but it remains a considerable power. Putin, furthermore, seems to have ambitions to restore the Russian Empire, with himself as Tsar.
There is, however, another problem. Almost a third of Russia's revenue comes from oil and natural gas extraction. And Russia's production is dropping, while increases in production in the United States and among the OPEC nations are lowering prices.
That's not a good place for Russia to be in right now. Michael S. Bernstam, a research fellow at the Hoover Institution at Stanford University, and Steven R. Rosefielde, a professor of economics at the University of North Carolina at Chapel Hill, in a recent article on the Barron's website, have presented some interesting analysis of how this may all end up.
Russia’s oil and gas empire is a dinosaur—big, rapacious, and dying off.
Earnings from Russia’s vast oil and gas network make up nearly half of its total export revenue and more than 30% of its budget revenue, including that needed to finance its war on Ukraine. But Western oil sanctions, the U.S. shale revolution, and an output-eager OPEC are eating away at the country’s oil and gas income. Russia’s own policy blunders aren’t helping.
Each day, U.S. shale drilling produces upward of 8 million barrels of oil and 80 billion cubic meters of natural gas—accounting for roughly 8% of global oil and more than 20% of global gas production annually. To compete for market share, the OPEC members shifted this year from tightening output to flooding the market with cheap oil. It aims to hit a 2.2 million bpd target in coming months, and ramped up production by 500,000 bpd last month alone. Oil prices dipped 2% this week after OPEC said it would likely boost production again in October.
That's great for the United States. It's pretty good for our allies, too. U.S. production is helping lower prices, and will only continue to do so as more and more of President Trump's "drill, baby drill" projects come online. Cheap and reliable energy boosts our economy more than the low prices hurt the producers; besides, the United States isn't dependent on oil revenues for a third of its national budget. Russia is, in effect, a gigantic gas station with a military branch.
What's more, Russia's production is dropping. It's not a catastrophic drop; not yet, anyway. The mid-90s saw a considerably worse crash in Russian oil output, followed by a recovery. But it's dropping again now, although it's still well above that mid-90s dip.
It gets worse for Russia. Bernstam and Rosefielde conclude:
The most salient symbol of Russia’s diminishing oil dynasty is its 65-year-old oil pipelines network: 2,500 miles of rusting pipes from Siberia to Western Europe, idle since the European Union oil embargo, and carrying only 0.2 mbd to the landlocked Hungary and Slovakia. The broader network of Russia’s pipelines—more than 6,100 miles long—remains empty or damaged.
They epitomize the demise of the Soviet and Russian energy empire. It will never come back.
It's not at all clear that Russia can afford to suddenly replace a large portion of its oil and gas pipelines.
So, what will happen to Russia if it's deprived of a large part of its oil revenue?
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Granted, Russia's new alliances, with China and India in particular, may well open some new markets for Russian oil and gas. The European market for Russian natural gas, in particular, has been replaced by Norway's North Sea reserves and even American LNG shipments. Could Russia solicit China's help in rebuilding its energy infrastructure? Allowing Chinese companies - companies that are controlled by the Chinese Communist Party - to take responsibility and ownership for Russian oil and gas pipelines seems a proposition fraught with risks. This is a Danegeld that Russia should not consider paying.
And, of course, none of this helps Russia's pending demographic collapse.
Russia under Vladimir Putin is already behaving badly. Seizing Crimea made some logistical sense for Russia in gaining better access to the warm-water port at Sevastopol. But the subsequent invasion of Ukraine, while Russia has come close to seizing some of the eastern Ukrainian territories with valuable mineral resources, seems more of a vanity project for Putin, in his ongoing ambition to rebuild either the Russian Empire or the Soviet Union. And if pressed harder, by collapsing infrastructure, by dropping oil and gas prices, by a population dying of apathy, what might the ambitious and desperate ruler of a dying superpower do?
This question should be causing a lot of furrowed brows in Europe right now, and in Washington, too. Only weeks ago, there was some cause for hope, following the Alaska Summit and the meeting of European leadership in Washington that followed.
But now? All that seems to be turning to ash. Russia's internal problems may well be making things worse, in ways that have not yet become apparent.
