Mailbag: Back from a Russian Century?

Four days and 50 reader views into our baby blog’s existence, we have been priveleged to receive a number of letters to our darussophileATyandexDOTru address. All of them deal with our Towards a New Russian Century? core article (which is, in addition, the most popular item on this blog by far – possibly because colleen was kind enough to link his winthrop88 blog to it).

The biggest critique of it, voiced by colleen and the letter writer DP, was my neglect of the topic of peak oil in my analysis of geopolitics in the next 20-30 years.

Colleen wrote in a comment:

It’s hard to predict the world in 2030. For example, if peak oil is a reality then maybe all bets are of especially if a replacement to fossil fuels is not developed.

DP expanded upon this:

Russia economic growth of 6-7% started when oil was $12 / barrel. Future growth predictions for the world are suspect. Not enough energy to power this growth. The world is not capable of producing much more than the 85m barrels that are being produced today and this will by all accounts decline. If the world would grow at a 3% rate that would mean by 2020 the world would need 120m barrels a day.

We respectfully disagree with this point about peak oil stalling world growth. Firstly, there is no shortage of other energy sources – shale oil, tar sands, etc. It might not be cheap, but extracting these is already more than feasible at today’s prices. There are still plenty of coal reserves, which can be liquified (as happened in apartheid South Africa).

The adjustment might dampen world growth, as people invest in energy conservation and renew vehicle fleets with lower gasoline consumption. Yet even in the 1970’s, when oil prices spiked and the GDP of the advanced industrialized countries was twice as energy intensive as today, growth continued nonetheless – albeit at a slightly slower space than in the previous two decades and marred by stagflation.

By the time Hubbert’s slope turns into a really large negative number, a great deal of progress will have been made into renewables and energy conservation. For instance, solar power will start booming from 2015 onwards, when its costs are projected to draw near to commercial rates for grid power (or sooner, allowing for tax breaks); meanwhile, the auto manufacturers will be churning out much less energy intensive plug-in hybrids and fully electric vehicles.

In the 1970’s, the oil spike came suddenly at a time when the US economy was twice as energy intensive as today and it was due to supply-side disruptions, as opposed to today’s smooth demand driven growth. Energy conservation, renewables and oil extraction technology lagged far behind today’s. Nonetheless, from 1970-79, US GDP / capita grew at an average rate of 2.3% / annum, an increase over 2.0% / annum from 1950-1970. Granted, unemployment rose (1.3% in 1960, 11.2% in 1983) and growth in labor productivity per hour worked fell from 2.3% during the years of the miracle economy to just 0.6% in 1973-79 – however, during the years of cheap oil in 1979-1996, it rose to just 0.8%, while GDP growth / capita fell even further to 1.5%. Since 2000 and the return of expensive oil, however, the US has chugged along well, doing better than the continental European countries (at least until very recently).

We can only conclude that ultimately, oil prices don’t really have that much of a big impact on the economic growth of its consumers.

Another point raised by DP was that of US debt, which was to cut short its aspirations to remain a global hegemon. Among concerns listed was the sovereign debt of 9tn $, the current account deficit and the declining value of the dollar.

We don’t think the US is in a particularly bad position in respect to its macroeconomics. 9trn $ public debt is 65% of US GDP, but that is the same as France (64%), and lower than Germany and Canada (both 68%), Italy (107%) and Japan (a whopping 178%). As for the housing bubble, this is a worldwide phenomenon – granted it is worse in the US than in most countries, but it is not exceptionally bad. Finally, the declining value of the dollar is just a sympton and a correction of the twin deficits. This will make it easier for the US to pay off its (dollar-denominated) debt and raise its exports – which has indeed begun to happen recently and thus cut its current account deficit as a % of GDP.

Another reader, CL, criticized the article for neglecting demographics, claiming that Russia and the European countries will be unable to exert power due to their decreasing populations.

Let’s try to see where this argument comes from. Traditionally, a decline in population is associated with bad things – war, famine, pestilence. This is because for much of human history, populations declined only under the aforementioned Malthusian conditions. The modern world of emancipated women, sexual revolution and the Pill has only recently given people the choice of purposefully limiting family size, and this fundamental fact should not be forgotten.

As I’ve already mentioned in my Reading Russia Right article, population decrease in Russia in 2007 was of the order of 0.15% / annum, and the trend was positive. But even linearly assuming that its population falls by 0.2% / year to 2030 (hitting 136mn) and that America’s continues growing at today’s 0.9% to 2030 (hitting 371mn), will it really matter that much? Its economy will still be much larger relative to the US than it is in 2008 (due to economic convergence). Furthermore, absolute economic size is only one of the components of what makes a superpower. Its position in hi-tech; the advantages accruing to it from global warming; its military-strategic and energy strength, will all be virtually unaffected – even in this worse-case demographic scenario.

To quote the Reading Russia Right article in extenso:

Furthermore, in economics, what matters isn’t the population or its growth rate per se, but the dynamics of the working age population as a percentage of the whole population – the dependency ratio. More people working generally translates into more wealth and a more stable pension system. According to Goldman Sachs (Dreaming with BRICs, pp.8), from 2005 to 2030 it will decline from 67% to 60% in Russia, compared with a similar decline in China and with a 62% to 54% decline in the G6. Hardly apocalyptic.

Granted, both Brazil and India will have healthier demographic profiles in that respect than China, Russia or the West. However, the real value of their young populations can be called into question due to their poor skills (as mentioned in Towards a New Russian Century?).

Furthermore, any demographic decline in Europe, Russia and Japan can be more than mitigated by increasing their labor force participation rate (especially amongst youth and 50+ year olds) up to American levels. This is a social decision with regard to which they are all wealthy enough to make a free choice.

Ultimately, all this discussion of demographics might well become moot sooner than we can imagine. 25 years, if the more ardent prophets of SENS (Strategies for Engineered Negligible Senescence) are right.