Lessons from the Russian gas debacle

There are a growing number of reports that Russia’s attempts to use gas exports as a geopolitical weapon have backfired. here Bloomberg:

Worse, Russia also tried to scare Ukraine’s friends out of the war with its brass energy knuckles, which drove up oil and gas prices. But the West is now taking those weapons away from Russia. Clara Ferreira Marquez wrote, and soon Russia’s bodybuilding will begin with it. We found solutions for Russian power; Europe is now swimming in so much gas that the price is less than zero. We have also rushed to embrace our renewables which will make Russia’s fossil fuels obsolete. And being deprived of foreign dollars and expertise will mean most of those fuels will stay in the ground.

Another one Bloomberg article Discusses the long-term implications for Russia:

Russia will never return to the level seen in 2021 in fossil fuel exports. Its share of internationally traded gas is seen shrinking from 30% last year to half by 2030. The country exported 7 million barrels of oil a day last year, but the IEA estimates that will drop by a quarter by 2030, even under the worst-case scenario. By the mid-2020s, North America was exporting more oil than Russia.

I see two important lessons from this failure:

1. Most pundits (including some economists) underestimate the ability of markets to “work” when the supply of a commodity is limited. We often read that it is technically impossible to do without X, and that it will take many years to ramp up production of alternatives. Remember that during covid we were assured that it would take a lot of time to produce various quantities of vaccines, masks, paxlovid etc and then production was easily blown away by pessimistic forecasts. I’m not suggesting that supply constraints are never a problem (Europe still faces some problems this winter), but rather that we should be skeptical of claims about how difficult it will be to avoid these constraints.

2. Related to the first point, attempts to use trade restrictions as a geopolitical weapon often backfire. I’m certainly not an expert on high-tech products, but we have to be careful that China is not doing a Sputnik-type project to develop its own technologically advanced manufacturing as a result of efforts to impose sanctions on China. A future crisis, which gives the US more leverage, is a situation where the Chinese economy depends on sophisticated computer chips from Taiwan and the US, or a situation where China has developed its own industry (albeit somewhat less “first generation”) and is mostly self-sufficient. has become

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