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Geopolitics of Energy GEOPOLITICS OF ENERGY Volume 42 Issue 10 November - December 2020 ISSN: 0273-1371 IN THIS ISSUE Socio-economic Impacts of the Decline in the Global Oil Demand: The Case of Russia Energy Strategy 2035 As Key Document for Russian Energy Security Geopolitics of Energy was founded by the late Melvin A. Conant of Washington, DC in 1979. Since 1993, it has been published under the auspices of the Canadian Energy Research Institute. All views expressed in this journal are those of the individual authors and do not reflect the views of the Canadian Energy Research Institute. Editorial Committee: Ganesh Doluweera and Allan Fogwill Contributors: Salim Abdi Sochi Iwuoha Chilenye Nwapi Kristina Baculáková Peter Jančovič Ayodele Oni Anis H. Bajrektarevic Wenran Jiang Natalia I. Pyatkova Mak Bajrektarevic Tomáš Kajánek Felipe Perez Andrianna Baleha Sanjay Kumar Kar Victor I. Rabchuk Rohit Bansal Larry Kaufmann Tamar Roitman Zuzana Benova Monika Kochajdova Biswajit Roy Nicola Bilotta Ewelina Kochanek Sergey Senderov Tanvi K. Chauhan Kristina Krupová Sutandra Singha Adam Cibul’a Mikhail Krutikhin Rashid Husain Syed Antonia Colibasanu Daniel Lamassa Roger Tissot Robert Cutler Vincent Lauerman Ifemezue Uma Athanasios Dagoumas Vadim Loktionov Konstantina Vlachava Tatiana Bruce da Silva lena Loktionova Sergey Vorobev Fernanda Delgado Michael Lynch Jiqiang Wang Oya S. Erdogdu Joao Victor Marques Mariana Weiss Elena Galperova Robert Mgendi Qianting Zhu Victor Gaspar Nalin Kumar Mohapatra Andrej Zrak Marcelo Gauto Richard Munang Natalia Hlavova Publication Date: January 26, 2021 Submit manuscripts and Letters to the Editor to Allan Fogwill at the address below or via email at [email protected]. Manuscripts dealing with energy and geopolitics, generally between 2,000 and 4,000 words in length, will be considered for publication. Unsolicited manuscripts will undergo peer review by members of the editorial board. Publisher: Canadian Energy Research Institute, #150, 3512 - 33 Street NW, Calgary, Alberta, Canada T2L 2A6 Telephone: (403) 282-1231; Fax: (403) 290-2251; Email: [email protected]. Reproduction without permission is prohibited. Socio-economic Impacts of the Decline in the Global Oil Demand: The Case of Russia Vadim I. Loktionov In 2020, the world economy faced a sharp drop in oil demand caused by such events as the COVID-19 pandemic and the subsequent lockdown. The most affected global economy segments are transport and aviation, which account for about 58% of total oil consumption in OECD countries1. Airlines around the world are experiencing the worst economic downturn in their history due to a closed sky. Quarantine measures have sharply reduced the use of road transport. Industrial production in all sectors was also affected. In general, the demand for oil and oil products has decreased by more than a third compared to the previous year, leading to a sharp drop in oil prices. Figure 1 shows the average monthly prices for Brent crude oil exported by Russia. The decline in oil demand may be long-term and irreversible. International Energy Agency (IEA) Executive Director Fatih Birol said that April 2020 could be the worst month ever experienced by the oil industry2. The increase in oil prices during summer 2020 became possible for two reasons: a partial cancellation of quarantine measures and a sharp reduction in oil production, especially by countries participating in the OPEC+ agreement, which agreed to cut production by 9.7 mb/d. Global oil production fell in May from 100 mb/d to 88 mb/d. Oil prices stabilized as oil supply approached oil demand. Figure 1: Crude Oil Prices (Brent) 3 80 70 60 50 40 30 20 U.S. dollars per barrel per dollars U.S. 10 0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul 2019 2019 2019 2019 2019 2019 2020 2020 2020 2020 2020 2020 2020 1 https://www.statista.com/statistics/307194/top-oil-consuming-sectors-worldwide/ (accessed on 24 July 2020) 2 https://www.reuters.com/article/us-iea-oil-birol/april-may-prove-worst-ever-month-for-oil-industry-ieas-birol- idUSKCN21X137 (accessed on 24 July 2020) 3 https://www.statista.com/statistics/262861/uk-brent-crude-oil-monthly-price-development/ (accessed on 24 July 2020) GEOPOLITICS OF ENERGY | NOVEMBER-DECEMBER 2020 1 Russia is one of the largest oil producers, exporting about 275 mln t of oil per year. Due to the low diversification of the economy and the high dependence of government revenues on oil and gas exports, the fall in global oil demand has significantly impacted Russia's socio-economic situation. As a result of the drop in global oil demand, the Russian crude oil export volume fell. From January to August 2020, oil exports from the Russian Federation decreased by 9.4% compared to the same period in 2019 and amounted to 159.818 mln t. At the same time, oil export revenue decreased by 39.9% and amounted to 48.799 bln dollars. Moreover, oil exports in August 2020 compared to August 2019 fell by 33%. Oil export revenues in August 2020 compared to August 2019 fell 2.2 times and became equal to 4.616 bln dollars. The decline in business activity and the fall in the country's oil and gas revenues have led to a drop in citizens' real disposable income. By the Federal State Statistics Service (Rosstat), from January to September 2020, Russians' real household gross disposable income decreased by 4.3%. According to Russia's official forecast of socio-economic development, the real household gross disposable income will decrease by 3% in 2020 and grow by 3% in 2021. Due to the second wave of coronavirus in Russia, the government's forecast may prove too optimistic. Given quarantine restrictions, the Russian economy cannot restore its full potential, which negatively influences Russians' incomes. According to scientists at the Higher School of Economics (Kuzminov, 2020), Russia's GDP in 2020 will fall by 4.2%-4.3%. At the beginning of 2022, after a recovery growth of 3.1% in 2021, Russia's real GDP will be lower than experts' previous expectations by 4.9%. Since the decline in global oil demand is likely to be long-term, there will be long-run consequences for the Russian economy. Russia will face the rise of the unemployment rate, fall of household income, etc., but also the structural changes in the Russian economy. In this context, the following issues become relevant: • how quickly the structural changes in Russia would take place; • what structural changes would take place in the economy; • how structural changes would affect the welfare of Russian citizens; • what should be done to initiate positive changes. Despite the significant influence of such factors as falling demand and prices for oil, the decline in global economic activity, and closing of national borders, Russia's structural changes will take place very slowly due to its economic system's high inertia. The features of Russia's industries have enhanced the institutional environment, which ensures self-reproduction of the current pattern of the Russian economy development. Since the collapse of the USSR, the Russian Federation has demonstrated extremely stable economic development patterns, based entirely on the oil and gas industry. The rapid rise in oil prices at the beginning of the new century was based on the Russian oil and gas industry recovery. The oil and gas industry became the engine of economic development. Though the industry was one of the main sectors of the Russian economy, its GDP share rose significantly from 6% in 1998 to 9.1% in 2004 (Slavkina, 2015). The fall in oil and gas prices in 2008-2009 and 2014 had not led to any structural changes in the Russian economy. Thus, there was no uprising in such sectors as renewable energy and high-tech industry. The Russian government repeatedly declared the need to develop non-oil and gas industries, but all these intentions were unfulfilled. A few reasons make the Russian economy maladaptive to changes in the global oil market and determine the pattern of social and economic development. 1. Historical patterns of solving socio-economic problems within the framework of public administration. For the last 20 years, solving social and economic problems within the public administration framework has been formed and regularly reproduced. A sharp increase in oil prices 2 GEOPOLITICS OF ENERGY | NOVEMBER-DECEMBER 2020 facilitated the recovery from economic crisis and reduction of social tension. The growth of oil export revenues ensured a significant inflow of the government’s financial resources to develop the oil and gas industry and address the most important social and economic problems. Priority development of the oil and gas industry ensured the growth of related industries and other segments of the national economy. Simultaneously, there were no fundamental changes in the state economic policy, driving a structural transformation of the Russian economy. Thus, in the early 2000s, the deep economic crisis was overcome thanks to the surge in oil prices, which led to an increase in government export revenues. The Russian economy grew rapidly due to the development of the oil and gas industry. There was a classic export-oriented economic growth. From 2001 to 2007, Russia's GDP's annual growth ranged from 4% to 7%. During this period, the Russian government used oil and gas revenues to solve the most critical social and economic problems. The development of the oil and gas industry and a positive foreign trade balance ensured other Russian economic sectors' growth. Nevertheless, there were no significant changes in the structure of the Russian economy. The oil and gas industry has still provided a significant part of the Russian federal budget revenues (about 40%). The share of mining in the Russian GDP structure increased from 2004 to 2019, from 9.6% to 12.6% (Figure 1).
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