- In1989, two years before the Soviet Union collapsed, the nation entered an acute phase of systemic crisis.
- Kondratiev first introduced the concept of long wave theory in his 1925 book, “The Major Economic Cycles.
- Saudi Arabia took the opportunity of Russia leaving OPEC to start a price war in order to gain larger market share.
This week, one of the main topics around the world is the so called “oil war” between Russia and Saudi Arabia. A myriad of publications are claiming the Russian economy will tank during this oil price war. According to the various economic models, the Russian economical crises is supposed to reach its peak in 2025. That is another reason, beside Putin’s personal aspirations, why he wants to remain in control of Russia. At that point, it could be possible for the West to weaken Russia.
It has been common to blame the drop in oil prices on Putin’s decision to leave OPEC, even though such discussions started taking place in the last year as well. It is also highly plausible Putin wants to create his alternative to OPEC with BRICS. The signs are there: Russia and China are aggressively entering African markets. Russia’s strategy is to offer support for African nations, and their leaders, to maintain sovereignty and to avoid coups.
OPEC has not been instrumental for sometime now. OPEC member countries control close to 30% of annual oil production and can bring down prices per barrel, but they can no longer create a deficit in the market and inflate prices. OPEC believes it can produce the same outcomes as it did in the 1970s. Nevertheless, it is simply not possible at this time. Additionally, any falling volumes are immediately compensated by American shale producers.
The specificity of shale oil production technologies is that at high production costs, capital investment in the well is required by an order of magnitude smaller, and therefore it is possible to increase production almost instantly. If prices fall, the well is simply preserved until better times. Regular oil fields cannot be exploited in such a way. Hence, Russia did not cause the oil prices to drop. In fact, Saudi Arabia used it as an opportunity to start a price war in hopes of expanding its market share.
In 1989, two years before the Soviet Union collapse, the nation entered an acute phase of systemic crisis. This cycle was predicted by the Kondratiev wave economic model, a concept that was introduced during the Russian Communist era by a sociologist economist. Nikolai D. Kondratiev first introduced the concept of long wave theory in his 1925 book, “The Major Economic Cycles.”
In 1990 there was a projected increase in prices for consumer goods in the Soviet Union. The Soviet monetary reform of 1991, commonly referred to as the Pavlov reform, was the last monetary reform prior to the official collapse of the Soviet Union. The purpose of the reform was to withdraw money from circulation for reallocation to the production of consumer goods, which were in short supply. All this happened against the background of a decline in world oil prices, but in fact this circumstance had a minimal impact on the Soviet economy as a whole.
It is also highly likely that Russia can afford at this time to have oil drop to even $5 per barrel, The paradigm as it stands will only contribute to further market crashes. Add the Coronavirus pandemic and economic hit. The end result as predicted by Kondratiev is global recession.
At this time, the oil price war will not hurt Russia as much as Saudi Arabia would like to believe, nor will it change the trajectory of the Kremlin’s agenda. It will simply lead to a faster alternative to OPEC right after the vote to amend the Russian constitution this spring. Therefore, it is a pointless crude price war at this time.