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Commodity Bust to Bring Down Russia?

There’s a must-read today from energy visionary Daniel Yergin in the Wall Street Journal. He analyzes the implications of the end of the commodity “supercycle”—the rising commodity prices, caused by surging demand in places like China, that have brought rapid GDP growth to several key players in the global economy. Some history:

The supercycle began a decade ago, in the middle of 2003. China had already reported two decades of 10% annual economic growth. In 2000, its growth began to speed up, fueled by a tilt toward heavy industry. The rapid pace of industrialization and urbanization led to accelerating demand for copper, iron ore and other commodities. China’s economy grew almost two and a half times from 2003-12. Hence it’s gargantuan appetite for commodities to fuel its industrial machine and support the shift of 20 million people a year from the countryside to cities.

The world’s commodity-supply system, accustomed to excess capacity and weaker demand for its products, was not ready. Something had to give, and that something was price. Commodity prices took off at a breathtaking pace. There was a stumble at the beginning of the recession in late 2008. Then, as Beijing’s massive stimulus kicked in, China’s economy roared back and so did the hunger for commodities. Copper prices reached their peak in 2011—six times higher than in 2003. China was consuming about 40% of the world’s copper, up from less than 20% in 2003.

As Yergin notes, this locomotive is running out of steam. China’s outsized appetite for raw materials seems to have been sated, with its leaders indicating that growth may be more moderate and powered by domestic consumption in the coming years. We’ve already noted that this slowdown is being felt in places like Australia and Brazil. Yergin wisely adds Putin’s Russia to the list of countries that will be feeling the pinch in the coming years.

Putin has been dancing on a knife’s edge in foreign policy. His deft bluffing and exploitation of President Obama’s errors have enabled him to position himself as an important player in the Middle East, and therefore in world politics as well. But Russia’s future is delicately balanced, at best, and its fortunes are intimately tied to the commodities markets. As Putin himself said in a recent economics forum, “There are no magic solutions.”

Finally, the US needn’t be too complacent either. The shale boom has been partly stoked by the same forces, which are now potentially waning. Oil prices have gone from $20-28 per barrel at the start of the decade to a sustained $100-$105 today. Right now, these prices are being held up by chaos in Middle East and Libya. If circumstances change, price shifts could give US drillers major headaches.

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  • Pete

    So Mr. Mead, will a wounded bear be more dangerous ….. or will it tend to shy away from confrontations?

    I fear that with the man-child we have as a leader, it will be the former, and that could be the start of a true disaster in the making

  • Atanu Maulik

    The oil and gas sector constitutes 3% of US economy. If the oil price crashes down to pre-boom levels the remaining 97% will thrive. But what happens to Russia and OPEC ?

  • Jacksonian_Libertarian

    The Russian commodity business is now a much smaller part of the Russian economy than it was 20 years ago, as the Russian economy has become much more diversified. It’s also true that Russian oil and gas are almost pure profit and can easily undercut shale oil and gas. So don’t expect Russia to go bust, it would hurt, but Russia will adjust much quicker than you might think, and certainly better than single product countries like the Arab oil countries.

  • Kavanna

    I hate to disagree with Dr. Yergin, but the commodity supercycle went on its upswing in 2000 or 2001, not 2003. And it’s not over — it has at least a couple more years left. Even if the Fed reduces its money printing, we have money printing from the UK and Japan, plus many developing economies. Currency wars indeed.

    However, in the longer run, there’s no doubt that the end of the supercycle will hurt Russia badly. Oil and gas form most of its trade and fiscal surpluses. Russia is a medium-sized power with a declining population that just happens to have nuclear weapons.

  • Craig Austin

    I don’t think Mr. Putin is afraid of much, but I think “fracking” chills him to the bone.

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