Murphy's Law: Oil, Tech And Freedom

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March 28, 2017: Despite the sanctions and low oil prices Russia continues to maintain high military spending. Usually details of how this works is hidden from the Russian public by increasing the size of the classified (“black”) budget. This doubled from 2010 to 2015 to $60 billion a year. Much of this is believed for defense related items. But in early 2017 the Russians admitted what was becoming obvious; that since 2015 the defense spending has gone down. It declined 3.8 percent in 2015, five percent in 2016 and is expected to decline 7 percent in 2017 and keep declining at least until 2020. The black budget shrank as well.

What Russia does not like to talk about is the cause of their persistent budget problems. As it was in the Cold War the main problems were low oil prices and American technology. It is happening again. The falling (dipping under $40 a barrel at times) price of oil and its devastating impact on the Russian economy was initially the work of Saudi Arabia and meant to weaken Iran and cripple resurgent American oil and gas production. Russia and Saudi Arabia thought they could end the low oil prices by cutting their own production that did not work when it was tried in 2016. No longer a short term threat Russia is now admitting that the low oil prices are causing them long-term problems. The primary cause of this long time problem has a name; hydraulic fracturing, or fracking. The main reason for persistent low oil prices was the development of effective fracking technology in the United States. This created a sharp increase in oil and natural gas production in North America. But fracking is expensive compared to just drilling and as the oil price declines a growing number of oil and natural gas operations dependent on fracking have to be shut down until the price increases again. The Saudis and Russia hoped the lower oil prices would kill off fracking, but that didn’t happen.

In the past rising oil prices always made it feasible to go after expensive to extract (like very deep or off-shore) oil and natural gas. As prices decline, these high cost operations have to be temporarily shut down, not eliminated entirely and forever. When some firms go bankrupt other firms buy up the assets and resume production when prices rise again. But it was worse than that with fracking because the lower prices simply encouraged the producers using fracking to improve their relative new technology. That has happened before but it is happening faster and on a larger scale because most of the frackable oil and gas is in North America where the voters and their governments encourage its use.

Meanwhile conventional oil reserves are found largely elsewhere, as in in Iraq (153 billion barrels), Iran (158 billion barrels), Saudi Arabia (266 billion) and Venezuela (300 billion). These four nations have the largest conventional reserves and those four comprise about 60 percent of the world total. These four nations and many of the lesser producers belong to an oil cartel which has, since the 1970s, kept oil prices high by controlling what is made available on the world market. What is keeping the world oil price low now is fracking. That new American technology is making much more oil and gas available and it is expected that the U.S. and Canada will soon have “proven reserves” equaling a third of the current world total conventional reserves. The fall in oil prices since 2013 (from over $100 a barrel to as low as $30) is expected to stay at $50 to $60 a barrel. For the moment the record high of $132 a barrel (in mid-2008) is gone.

In the midst of all these money woes Russia also complains that it is also dealing with chronic reliability and quality control problems in their defense industries. Some Russians have noted that the West has far fewer problems in that area, especially when it comes to fracking. The Russian government does not want to dwell on that angle just yet, but eventually may be forced to. Fracking is not all that complex and Russia can develop such tech but not the kind of culture that encourages new tech being put to effective use. This is not just a Russian problem, it is common throughout the Moslem world where it is often declared “un-Islamic” to encourage the use, much less development, of new tech.

 

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