The Russians are coming

I have been reading economics for the past 2 weeks and studying the Russian oil and gas industry. One of the most incredible aspects of what I have been reading is the sheer potential of the Russian economy. For sure Russia has been mentioned in the same breath as China, India and Brazil as one of the emerging markets but for me this could actually be the most important, certainly inside the next decade.

China has more people hence more consumers but for hands down wealth potential there is nothing to even come close to what Russia has. It all comes down to two little three-letter words that I have already mentioned, oil and gas ("and" is also a three letter word but is not worth a whole lot).

Put simply not only does Russia have a load of oil and gas in reserve, they have the capacity to produce more than almost anyone else in the world, maybe with the exception of the Saudis. The Russians have benefited from a devaluation of their currency some years ago and this lowered their production costs dramatically meaning profits have soared in recent times. Another factor is that they are not members of OPEC and don't have to kiss up to OPEC the way many other oil producing nations do. This is a distinct advantage.

Another element is the nature of the way that foreign companies are permitted to operate at present inside Russia. It's not perfect competition in any sense so foreign companies must act as partners with Russian entities and this means they have limited opportunities unlike in other oil-rich markets. In addition much of the oil and gas industry was sold off in the 90s but has been gradually taken back under the control of the state. Major players like Gazprom have a large chunk of their stock owned by the Russian state.

Anyway when you do the straight line projections in Excel and work out what is possible given the certainly-likely scenario of oil price increases then these guys are in a position to resume their role as super-power and to join the US once again at the top table of influence.

The only downside is that the oil reserves of the entire planet are due to run out at some point in this current century although some disagree with that view. Before that happens oil prices are expected to peak and I've seen figures of $182 per barrel (!!!) quoted as a likely peak price. This is very scary.

Using these kinds of numbers you can get some sense of why oil is significant to the Russians.

However now that the US has started to catch on to the need for other forms of energy, applying simple economic principles around demand and supply, it's possible that if demand for oil starts to drop because we're using alternative sources of energy such as cow dung in each of our Lexus RX-h cars then oil prices become irrelevant for many of us and they will surely start to drop.

The Russians are coming but the good news is that they want what we want. Starbucks, Mercecdes-Benz, Ski holidays and Digital TV.

Let's hope those Japanese guys get the whole "petrol from cow dung" thing sorted quickly.