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Tuesday, January 13, 2009
"China is a country of enormous tensions and cleavages beneath the surface.... The question is whether policy actions to date will do enough to stem a socially and politically dangerous slowdown in the economy. Whichever way the Chinese leadership responds, future generations may remember 2009 less for its global economic and financial crisis than for the momentous transformation it will have caused in China."
Dan Drezner also raises a number of excellent points concerning China, as well as several other "known unknowns" from the current financial mess. He thinks we can expect countries like China to begin de-coupling by using their fiscal stimulus plans to target domestic firms and encourage the growth of domestic markets to offset declining demand abroad. That's a roundabout way of suggesting that protectionism in on the rise and the gains in political cooperation that come from economic interdependence are on the decline. I would argue that this situation, along with the macroeconomic imbalances problem, calls for more international cooperation, not less, but is Drezner's prediction more likely?
- Russia and the Ukraine have signed a deal to resume gas flows under the supervision of international authorities. Is Russia's plummeting ruble going to make the country more or less aggressive over its energy supply policies. Or maybe: is Russia's weakening economic situation going to embolden countries like the Ukraine to provoke them even further?
Wednesday, December 31, 2008
Natural gas negotiations between Russia and Ukraine collapsed Wednesday, with Russia preparing to cut gas deliveries tomorrow. This would be the second time in 3 years that Gazprom has cut deliveries to Ukraine over a price dispute, in turn threatening supplies to the EU. Ukraine is the EU's major transit route for gas deliveries, with over 80% of the bloc's external gas supply traveling over its territory.
The latest Russo-Ukrainian gas row is a reminder that despite the current (low) price levels, energy security remains a major issue, particularly to countries with heavy reliance on external supplies. It may also presage a more aggressive Kremlin in 2009, one that seeks to renegotiate gas contracts (particularly with former Soviet republics paying below market prices) with more frequency and adopts a less compromising position.
As Russia's budget comes under greater pressure, the rouble is devalued further (by as much as 10%, as many economists believe is necessary to account for the loss of petro/gas revenues, a cut the Kremlin has resisted with all of its will) and political unrest rises, the Kremlin will struggle to prop up the Russian economy. It will almost certainly turn to its energy leverage to plug the shortfall and boost spending.
Putin's authoritarian consolidation and economic nationalism have relied on a middle class complacency derived from petro/gas riches. The boom years were financed by the commodity bubble. Over this period the Russian government failed to adequately diversify, liberalize and modernize its economy. This made the Kremlin overly reliant on companies like Gazprom for tax revenues (and spending). Due to excessive state intervention and legal uncertainty, particularly when dealing with foreign investors, Russian industry became overly reliant on the Kremlin for finance and favor. What developed was an economy fundamentally underpined by high commodity prices. This house of cards was always vulnerable to a price collapse. Now that its here, the tight societal weave of Putin's Russia is starting to fray. It is unclear whether Putin/Medvedev are prepared to mend it.
Russia's resurgence has as much to do with oil and gas as it does with Putin. The major question for Russia in 2009 is: how does Putin respond?
Wednesday, November 12, 2008
A number of important developments in the global energy markets over the past few weeks:
-an IEA report finds that the world's oil output is declining at a rapid pace. The annual rate of decline is projected at 9.1% without a substantial increase in upstream investment. Even after recent investment, output from the world's largest oil fields is falling by over 6%. As my analysis of Russian energy production highlighted, an increase in upstream investment is neither easy nor probable. Falling global demand will only lessen the incentive to invest more in production. With little excess capacity, and OPEC voluntarily cutting production (potentially by millions of barrels of day more in the coming months), the global oil markets risk renewed volatility when demand recovers.
-Russia and China signed a landmark oil pipeline agreement on October 28th. The addition to the East Siberia-Pacific ocean trunk pipeline could ultimately carry up to 15 million tons of Russian oil to China per year. The agreement is significant on two levels: it signals Russia's desire to pursue the "China alternative", and it could portend a greater financial role for China in Russia's energy sector.
-finally, we might look back on October 13th as the beginning of a new era in European energy. The Times of London is reporting that the bloc will announce a European Energy Security Plan. The plan calls for: 1) the construction of a European supergrid, connecting power grids from North Sea wind farms to the Baltics, 2) the construction of two new gas pipelines, connecting Caspian and African gas to the bloc, and 3) a "Community Gas Ring", which would essentially allow for the pooling of European gas supplies in the event of supply disruptions. These measures will directly address import diversification (particularly in natural gas, and specifically away from Russia), security of supply issues, and fragmented national power grids.
This is a highly ambitious plan, and in my opinion, one that has absolutely no chance of being carried out in its entirety. The pipelines just aren't commercially viable yet. Furthermore, the national regulatory and interest-group challenges to EU-wide liberalization in the energy sector are formidable, and to date have blocked any substantive effort towards a single European energy market. The political will simply isn't there in France/Germany/Italy, and national interests always trump regional considerations in European energy. Despite my pessimism, the Plan is an important development, if for only one reason: it coincides with the resumption of talks between the EU and Russia over their economic and energy relationship. It looks like the EU may have finally come around to playing hard ball with Russia, and utilizing its leverage over Russian security of demand. Stay tuned for updates on these discussions over the coming weeks.
