Russia is a clinical case of "Dutch disease"

Oil gave Putin the funds to unleash war. Though even without Western sanctions he ruled an economically handicapped country. As the late Senator John McCain once rightly stated, Russia is "a big petrol station pretending to be a country", only that it is armed with nuclear weapons inherited from the USSR, says Andrzej Krajewski, historian, journalist and author of the book 'Oil. Blood of Civilisation'.

TVP WEEKLY: It is said that the price of oil will decide the 'to be or not to be' of Russian President Vladimir Putin. Is this true?

The so-called price ceiling will be the most important element of the sanctions. Setting a price ceiling could lead to a significant reduction in revenue for the Russian budget. At the same time, it will not shake the market supply, as the Russians have to sell oil anyway, even if only non-European countries, including above all China and India, will buy it. There are also still a few countries for which increasing production is not a technical problem if the need arises, such as Saudi Arabia.

SIGN UP TO OUR PAGE Is that why the Sheikhs' attitude is crucial in the game of finishing off Putin?

It is very significant. Not only because of Saudi Arabia's position in the ranking of exporters, but also because of the abundance of deposits, the scale of extraction and thus the influence on price formation. Besides, not only are the deposits there among the largest in the world, they are also easily accessible and very cheap to extract. The Sauds - for after all, Arabia is actually privately owned by the family - will survive any crisis of overproduction should it occur. It costs their conglomerate, Saudi Aramco, about $2 to extract a barrel of oil from under the desert sands. When they sell it for $30, they still record a lavish profit. Russia, at the same price per barrel, stands on the edge of the abyss.

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That is, Saudi Arabia could, by raising production, bring Russia's budget to its knees.

But it is not necessarily interested in this. Besides, it is no longer as big ally of the US as it was in the 1980s. Back then, the Americans provided the Saudis with protection against Iraq, Iran and the Soviet Union. At the same time supplying state-of-the-art weapons. The Sauds' cooperation with the US contributed to the bankruptcy of the Soviet Union. It was enough that they kept production high. The low price of oil proved to be one of the main reasons for the collapse of the communist empire. Today, the Saudis are more harsh friends with the Americans. Riyadh is turning towards China. Besides, Joe Biden irked them when he spoke out forcefully about the murdered Jamal Khashukhi, a Saudi journalist who criticised the regime (he disappeared on 2 October 2018 after entering the Saudi consulate general in Istanbul. All indications are that he was murdered there. The UN Human Rights Office held the Saudi Arabian authorities responsible for the murder and described it as an "extrajudicial premeditated execution" - ed. note).

So what is the global oil situation really like? Are turbulent times affecting the global production curve?

No matter what, extraction is constantly going up with each decade. In the 21st century, the only moments of slight decline were during the pandemic and, before that, the economic crisis of 2008. "Blood" of our civilisation is doing well and is expected to continue to do so until the 2030s of the current century, extraction and consumption will continue to increase. After that there is supposed to be a stabilisation and decline, although it is uncertain whether the predictions will come true. Interestingly, the war caused by Russia has only briefly pushed the price up to the 2008 ceiling. In contrast, it is changing the directions of supply. Russia is losing the European market and has to sell fuel to China and India, offering sizable price discounts, and that hurts. Western sanctions will force this to continue for a long time. At the same time, there are no fears that the oil market is threatened by a shortage of crude, even though Iran and, after all, Venezuela, which has the largest oil reserves in the world, among others, are largely cut off for reasons of sanctions.

And not so long ago, the world feared the shock of war.

And yes, after 24 February 2022, the price of crude jumped, but only for a few months, stabilising again at around $80 per barrel. Daily world consumption is 100 million barrels....

A barrel is 159 litres. I have calculated for myself that every day oil producers fill with oil a volume equivalent to more than 4,500 thousand Olympic swimming pools. An almost unimaginable quantity.

That's right. That's about 16 billion litres extracted worldwide every day. I use another example. The extractive industry provides 2 litres of oil for every person on the planet. That's as much as each of us in the world drinks water. In addition, oil consumption is growing along with the world's population, which recently passed 8 billion and is growing at its best.

So what about predictions of depletion??

For the time being, ideas for similarly apocalyptic visions are running out. First there was the Limits to Growth document produced in 1972 (the so-called Club of Rome report), which foretold the end of the crude in the 1990s. Nowadays, the forecasts are moving into the indefinite future with each decade. It seems that there is no question of depleting the world's oil reserves by 2100. Above all, new deposits are still being discovered. In addition, a technological revolution took place at the beginning of this century. In the United States, an innovative technique called fracking was implemented to extract gas and oil from shale deposits. This has once again, after a gap of more than half a century, ensured that the USA is self-sufficient in fuel, which had been lost due to the depletion of traditional deposits in Pennsylvania, Texas or Alaska.
Gazprom's headquarters, the Lakhta Centre office and conference complex in St. Petersburg. Photo: Peter Kovalev / TASS / Forum
And what is the relationship between the ranking of oil producers and global conflicts? It seems that most of them in the last two decades - the destabilisation of Iraq, the sanctions on Iran, the chaos in Venezuela, the elimination of Gaddafi in Libya - have been to the advantage of the main producer, America?

The United States became seriously involved in the Middle East at the same time as its oldest deposits exploited since the 19th century began to dry up. They then skilfully took over the niche left by the British colonial empire after its disintegration. After all, Iran was for a long time Washington's most important foothold in the Middle East, while Saudi Arabia was a very close ally. However, the military intervention in Iraq already in the 21st century proved to be George Bush junior's greatest political mistake, bringing destabilisation to the entire region. America has not suffered significant consequences precisely because of the shale revolution. Thanks to it, production in the United States began to increase rapidly after 2008 and it eventually became the world leader in this field. As a result, already under Barack Obama's presidency, the USA ceased to be as involved in Middle East politics and gradually reduced its presence there. This is a good illustration of how the issue of fossil fuels affects the game of geopolitics.

In your book, you explain the concept of the 'Dutch disease'. Why is its clinical case Putin's Russia?

Because the country and its ruling elite, descended from the KGB, have become completely dependent on oil. "Dutch disease" is an economic term that defines how valuable natural resources and the ease of obtaining them can disrupt a country's economic development and demoralise the political class.

And what does the Netherlands have to do with it?

In the 1950s, the largest gas deposits in Europe were discovered in this country near Groningen. It would seem that nothing better could happen to a wealthy, democratic country. Yet this wealth became a problem, even though it generated enormous profits. It was precisely because of this, however, that from the end of the 1960s industrial production and investment in the Netherlands began to decline, while unemployment rose steadily. At the same time, the state had more and more money for social programmes, which in turn made part of the population passive. As if this was not enough, the economic situation in the Netherlands brought a successive strengthening of the guilder. This meant that exporting goods abroad became less and less competitive and industry died. As a result, by the end of the 1970s the country was already deeply stagnant and the population was becoming poorer. Fortunately, the government in The Hague embarked on radical economic reforms and reduced gas extraction and cured itself. In another way, dependence on raw materials was avoided by Norway, which created an investment fund to take over most of the profits from oil and gas extraction and to be a strategic reserve for future generations.

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Is it due to the quality of the political class?

It is crucial. In authoritarian states, these processes take a much more dangerous course. Natural resources become a source of immense wealth. Later, corruption grows, but so does the unhealthy political ambition of the leaders, especially in countries with dictatorial powers. Dictators like to challenge other countries and seek a sense of security in their own nuclear weapons. After all, Gaddafi dreamt of them in Libya and Saddam Hussein in Iraq. Russia is a clinical example of the 'Dutch disease'. Its deepening has gone hand in hand with the dismantling of the remnants of democracy and the consolidation of Putin's authoritarian power. Oil gave him the funds to unleash war. Even without Western sanctions, Putin ruled an economically disadvantaged country. As the late Senator John McCain once rightly said, Russia is "a big petrol station pretending to be a country", only armed with nuclear weapons inherited from the USSR.

And how is this whole energy ecosystem affected by a recent decision of the European Parliament? We are cutting the fuel cord by banning the registration of combustion cars in the future.

Only the future will tell how this provision will be implemented and how it will affect the consumption of oil-based fuels in practice. Above all, today it raises fears of taking away something hitherto obvious from ordinary people, namely the freedom of individual movement over longer distances - and this has shaped the entire 20th century - without offering something equivalent in return.

Electric cars are currently two to three times more expensive than those with an internal combustion engine. The main reason for this is the batteries, which require the hard-to-reach elements lithium and cobalt. The cost of lithium-ion batteries is more than half the price of a car. At the same time, current global extraction of these elements allows the production of around 10 million electric cars per year. This barrier forces an intensive search for new deposits. At the scale of global demand, more than 200 new lithium mines must be developed in the next two decades. Meanwhile, they devastate the environment just as effectively as lignite mines. At the same time, if we consider how much carbon dioxide is emitted during the process of raw material extraction and battery production, it turns out that, on a mass scale, the use of hybrid cars generates less CO2 than the mass use of electric ones. Therefore, eliminating new non-electric or hydrogen-powered cars from the European Union after 2035 seems to be a questionable decision on the merits for at least several reasons.

However, if this is the case - because all deadlines are sometimes postponed - then a car of one's own may turn out to be an increasingly luxurious good, accessible to the richer. Who knows whether the poorer ones might then be faced with a replication of the "Cuban model": in other words, a car with a liquid-fuelled engine, treated with great care, will become a family jewel, handed down from generation to generation (laughter).

– Interviewed by Cezary Korycki
- translated by Tomasz Krzyżanowski

TVP WEEKLY. Editorial team and jornalists

Main photo: An oil rig in Saudi Arabia will become a marine theme park and tourist resort called The Rig. Photo: Public Investment Fund/Mega / The Mega Agency / Forum
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