Weak OilThe Looming Collapse of Putin’s Petro Dictatorship

The Kremlin needs a permanent state of hybrid warfare in Europe to stop a global energy system transformation that will unravel Russia’s oligarchic fossil fuel economy

Russia’s invasion of Ukraine is not a symbol of strength, but a prelude to its demise as the entire global geopolitical order is reshaped in the context of a wholesale transformation of the energy system that will complete within the next two decades.

In his weekend speech in Warsaw, President Joe Biden promised to help “Europe end its dependence on Russian fossil fuels” – including moving “as quickly as possible to clean, renewable energy”. He added:

“… the days of any nation being subject to the whims of a tyrant for its energy needs are over. They must end.”

But Biden perhaps did not anticipate how correct he might actually be: because the war in Ukraine is Putin’s trump card, a last-ditch effort to forestall the unwinding of the age of fossil fuels using military power. As such, I conclude, Putin’s strategy was never about winning a quick, decisive victory in Ukraine. Rather, he wanted to prepare the ground to be capable of creating a state of permanent instability in Europe that he can deploy as a lever to keep oil prices high in a bid to make Russia’s last oil frontier in Siberia economically feasible. This ploy has now been tested in Ukraine – and may be deployed again when deemed necessary as Russia’s fossil fuel economy dips further into crisis in coming years.

Facts on the ground have already complicated this strategy: what happens next hinges on whether Putin recognises that his war will accelerate the very economic obsolescence he wanted to forestall.

The implication is stark: the total disruption of fossil fuel industries over the coming decades represents economic Armageddon for Russia.

Russia is the world’s largest oil and gas exporter in the world. Despite Putin’s hopes, his war on Ukraine will irreversibly damage this position, and accelerate the collapse of the primary export trades on which Russia’s economy is most dependent. Russia’s actions have already prompted its largest clients in Europe to rethink their dependence on Russian fossil fuels in a way they have never done before. Germany, the biggest consumer of Russian gas, has brought forward its renewable energy targets and is actively seeking alternative sources of fossil fuels.

But this is just part of a much larger picture. We stand in the dawn of a wider process of transformation in the global energy system that is unfolding far quicker than conventional analysts believed possible. If we fail to understand this transformation, we will continue to be caught off guard as it manifests in further episodes of geopolitical destabilisation.

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The Industrial Oligarchy

Russia’s geopolitical and military power is bound up with its position today as, arguably, the world’s pre-eminent industrial fossil fuel power. Its geopolitical ascent has been a direct outcome of Vladimir Putin’s efforts to centralise state control over the country’s most productive enterprises, run by an incestuous clique of oligarchs.

Putin’s strategy has been highly successful. It has resulted in Russia becoming the world’s number one exporter of oil, gas and wheat, the latter produced through intensive fossil fuel-based industrial agriculture. Russia is also a major exporter of many other key industrial products and raw materials and has built up massive cash reserves from this global export business.

So Russia’s internal oligarchic autocracy and military structures are fundamentally premised on its extraction-based economy, which depends on the global consumption of Russia’s fossil fuel commodities. Russian power, then, is an integral part of a capitalist world system in which the vast majority of countries in every major region of the world are dependent on fossil fuels.

But this system – both on the global scale and within Russia – is in decline. At the heart of this decline is a transformation of the global energy system playing out through two interlinked processes: the increasingly uneconomical dynamics of the global fossil fuel system premised on increasingly expensive methods of extracting scarce resources; and the accelerating deployment of an emerging clean energy system premised on increasingly cheap and improving renewable energy technologies.

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Warnings: Weak Oil

Eight years ago, Silicon Valley entrepreneur and investor Tony Seba released his book, Clean Disruption of Energy and Transportation: How Silicon Valley Will Make Oil, Nuclear, Natural Gas, Coal, Electric Utilities and Conventional Cars Obsolete by 2030. Seba’s book projected that solar, wind, batteries (SWB) and electric vehicles (EVs) were on track to become so cheap and efficient they would rapidly displace incumbent fossil fuel energy and internal combustion engine vehicles by around 2030.

Clean Disruption’s cost curves for these technologies pointed to 2020 as the ‘rupture point’ for both the energy and transportation disruptions – the point at which the disruptive technologies become increasingly and irreversibly cheaper than the incumbents.

Two years later, Seba was among a group of experts invited by the CNA’s Military Advisory Board in Arlington, Virginia – an elite group of retired three- and four-star military officers from the US Army, Navy, Air Force, and Marine Corps – to advise on energy and national security. CNA is a renowned think-tank that runs research for a range of US military and government agencies.

At the meeting, Seba warned that due to the acceleration of the clean energy disruption, US military leaders would need to consider the probability of Russian aggression during the 2020s. As incumbent energy industries become increasingly obsolete through this decade, so too would the centralised military and geopolitical architectures they depend on. Peak oil demand would leave a powerful petro-state like Russia – with its history of military adventurism – few options but to resort to aggression to maximise extraction opportunities.

At the CNA sessions in 2016, Seba first met technology investor James Arbib. Together, they would go on to found the technology forecasting think-tank RethinkX, where I work today. RethinkX’s first report was about the transport disruption driven by EVs and eventually autonomous EVs – and it correctly predicted the decline in oil demand resulting in a collapse of oil prices to $20 a barrel due to the impact of multiple disruptions including smartphones, EVs, batteries and expanding SWB.

The oil price collapse played the key role in pushing Russia into a deepening recession. But this was just the beginning. In January 2022, oil and gas-related taxes and export tariffs accounted for 45% of Russia’s federal budget according to the International Energy Agency (IEA), and the energy sector contributes some 25% of the country’s GDP.

The implication is stark: the total disruption of fossil fuel industries over the coming decades represents economic Armageddon for Russia.

Around the time of Seba’s warning to US military leaders, I had also expected an escalation of conflict involving Europe, Russia and Ukraine linked to energy issues, and warned as much in my scientific monograph published in 2017, Failing States, Collapsing Systems: BioPhysical Triggers of Political Violence (Springer Energy Briefs).

My analysis was based on a different lens. While Seba had focused on the impact of exponentially improving technologies, I was focusing on the economic decline of incumbent industries.

“Geopolitical turmoil that has unfolded in Ukraine, provides a compelling indication that such HSD [human system destabilisation] processes are rapidly moving from the periphery of the global system into the core,” I wrote.

My diagnosis was based on examining the transition of Europe from a continent of major oil and gas producers, into a net importer that had become increasingly dependent on Russian exports, as well as other countries.

“Within Europe, resource depletion has meant that the European Union as a whole has become increasingly dependent on energy imports from Russia, the Middle East, Central Asia and Africa. Yet exports from these regions will become tighter as major oil producers approach production limits.”

Although the Euro-Atlantic core, “traditionally representing the most powerful sections of the world system” has mostly “insulated itself from global crisis convergence impacts by diversifying energy supply sources”, this was about to change. As the “total energetic and economic quality of global hydrocarbon resource production is declining”, I wrote, over “the next decade, the Euro-Atlantic core will be forced to contend with this reality.”

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The Protracted Collapse of the Oil Age

One concept that can help us understand this broader decline is ‘Energy Return on Investment’ (EROI), a ratio that attempts to measure how much energy we put in, to get a certain amount of energy out. The more energy needed to extract energy, the less surplus ‘net energy’ we have left to support goods and services in the economy outside the energy system. When I surveyed the scientific literature in Failing States, Collapsing Systems, I found a remarkable consensus: that surplus is running increasingly thin. 

In the early 1900s, the EROI of fossil fuels was as high as 100:1: a single unit of energy could extract hundred-fold times more. But as we’ve had to extract fossil fuels using increasingly expensive techniques in more remote locations to access more difficult-to-reach unconventional oil and gas, we need to use more energy – while getting less energy out. Between 1960 and 1980, the world average value EROI for fossil fuels declined by more than half, from about 35:1 to 15:1. More recent data puts the current EROI of fossil fuels value between 6:1 and 3:1, depending on which assumptions are used.

According to University of Surrey economist and former UK Government advisor, Professor Tim Jackson, along with his co-author Dr Andrew Jackson, this unmistakable decline in the EROI of oil, gas and coal has acted as a background ‘brake’ on the rate of economic growth for the world’s advanced industrial economies, which has been slowing down since the 1970s.

These trends came to a head as we crossed into the new millennium. By 2005, we were seeing oil price hikes which intensified through to 2008. They played the major role in triggering the debt defaults that precipitated the global financial crash. Those price hikes happened because the world had reached a turning point – global, cheap conventional oil production had plateaued, and the industry then had to shift increasingly toward more difficult-to-extract unconventional energy sources.

Oil isn’t running out. We have more than enough to fry the planet several times over. But its resource quality is declining. We now need more energy than ever before to keep extracting energy.

This predicament will continue deteriorating over the next decade. Last year, a team of French scientists who work for the government-backed National Institute for Research in Digital Science and Technology found that the world is already using a tenth of the energy produced globally to keep producing oil. By 2024 – in just two years – this will increase to a quarter, a predicament verging on being economically unsustainable. By 2050, fully half of the energy extracted from global oil reserves will need to be put back into new extraction to keep producing oil: equivalent to total collapse.

These trends, then, are symptomatic of the defining nature of fossil fuel industries: self-cannibalistic extraction which generates diminishing returns.

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Russia’s energy decline

This global trend of fossil fuel demand is also playing out in Russia. In recent years, several studies – including internal Russian government studies – have anticipated that Russia’s domestic oil production would soon peak and decline due to internal economic and geological challenges.

In 2013, HSBC forecasted that Russia would hit peak oil between 2018 and 2019, experiencing a brief plateau before declining by 30 per cent from 2020 to 2025. Fitch Ratings came to pretty much the same conclusion, noting that only further exploration in remote locations in Siberia over many years might make-up for this decline – a task that would require oil prices above $100 to become economically feasible.

The Russian government was well-aware of the challenge. Also that year, Vladimir A. Kashirtsev, deputy director of the Russian state-controlled Trofimuk Institute of Petroleum Geology and Geophysics (part of the Siberian Branch of the Russian Academy of Sciences), predicted that Russian conventional oil production would hit its peak around 2036, following which it would need to shift to more expensive heavy oil and bitumen reserves in eastern Siberia.

Despite the variations between these predictions, they correctly identified the broad direction of travel: a future of diminishing returns and escalating costs.

They also converged on a single, unavoidable verdict: Russia’s ambition to keep its fossil fuel economy alive by expanding the production of difficult-to-extract unconventional resources would only be economically feasible with much higher oil prices.

By 2014, the shift in global oil production away from conventional to unconventional resources fuelled a rapid expansion of US shale production leading to a sudden supply boom. OPEC producers responded by keeping their own output high to retain market share. The result was a temporary global oil glut.

Global GDP growth was already on an intensifying downwards trajectory as the world had entered a new era of difficult oil. Neither the oil industry nor the world’s top financial institutions, understood the dynamics of what was going on (and still don’t). Every year from 2010 to 2019, the IMF kept predicting a robust GDP rebound. Each time, they were completely wrong, and growth was lower than expected – and with it demand for oil. But many oil production projects that were coming online that decade had been approved before the 2008 financial crash, when demand was stronger. The mismatch meant that the world was producing far more oil than the economy wanted.

The war has provided Putin with the boon of triple-digit oil prices, enriching Russian energy firms and bolstering Russian state cash reserves.

After 2008, the world had flipped into a new era where the decline in fossil fuel resource quality had passed a crucial tipping point. This had helped push the global economy into a new age of economic contraction and slow growth. With demand plummeting to unexpected levels, oil projects planned in the heyday of pre-2008 economic growth, combined with geopolitical competition between oil producers, produced a supply glut that further crushed oil prices.

But that was just the beginning. After 2020, as Tony Seba had forecast, Russia would face the next oil demand crisis from the impact of the SWB and EV disruptions. Solar, wind and batteries had already become the cheapest form of electricity in most regions of the world well before this point, and are still getting cheaper as they continue to scale. By 2021, EVs had reached cost parity – and in some cases were cheaper – than fossil-fuelled vehicles, sparking the beginnings of an exponential lift-off in sales. Bloomberg anticipated that EV sales “could displace oil demand of 2 million barrels a day as early as 2023. That would create a glut of oil equivalent to what triggered the 2014 oil crisis.”

As we entered the 2020s, in other words, Russia would face a perfect energy storm: the prospect of evaporating demand due to the accelerating SWB and EV disruptions, alongside a crisis of declining domestic fossil fuel resource quality.

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The pandemic

Meanwhile, the pattern of declining global oil prices sparked in 2014 continued to intensify through to 2020 – the year of the global COVID-19 pandemic.

The pandemic accelerated the oil price collapse as global lockdowns crushed demand even further. The result, for the first time in history, was negative oil prices. Covid thus compounded the impact of technology disruptions that were already helping to drive down fossil fuel demand. And it offered Russia a glimpse of what could be in store in coming years.

The negative oil prices, however, created the conditions for a supply shock as negative oil prices forced drilling and new investment to shut down. The prolonged well closures in some cases caused damage to existing reserves, making it more expensive to restart drilling once lockdowns began to lift. With producers no longer producing because they couldn’t afford to amidst the demand collapse, creating a spate of bankruptcies across the oil industry worldwide, the oil price collapse led to global scarcity when demand began to lift again. By 2021, oil prices were rushing back up as re-opening economies demanded more resources which were slower and more expensive to extract in the context of a fossil fuel industry debilitated by the pandemic.

The sudden oil price spikes were a boon to the Russian economy. They reinforced the sense that the key to Russia’s fortunes was making sure the price is right.

This is why Putin’s war was at first seemingly welcomed by many of the world’s autocratic petro-states.

Meanwhile, though, Russia’s own Energy Ministry was seeing the writing on the wall, warning in April 2021 that Russian oil production might never recover to pre-Covid levels. Although Russian oil production was expected to continue growing over the next decade, the government’s most probable scenario was that production would fail to reach 2019 levels of 11.3 million barrels a day (mbd). Instead, it would hit a lower peak of 11.1 mbd by 2029, before entering a process of terminal decline that would accelerate from 2035 onwards.

This forecast is broadly consistent with the earlier analysis of the Siberian Branch of the Russian Academy of Sciences. It confirmed that Russia is being forced toward more expensive unconventional resources. But those resources are definitively unrecoverable in a climate of lower oil prices due to declining oil demand, driven by slow growth and accelerating disruptions of the energy and transport sectors.

Yet over the next two decades, the combination of technology disruptions and geological challenges reveal that Russia’s fossil fuel economy is on track to shrink and evaporate. Its military and oligarchic political structures which depend on this economy are therefore also on track for an irrevocable decline.

With its energy export-dependent economy facing an irreversible and intensifying contraction that would undermine the existing oligarchic status quo, the bedrock of everything Putin has attempted to build is bound to unravel.

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Putin’s last stand

Enter the war in Ukraine. It has offered a geopolitical mechanism to lift oil prices to triple-digit levels, consolidating Russia’s ability to maximise oil revenues despite the prospect of decline. This suggests that conventional analysts have fundamentally misread Putin’s goals in Ukraine. Putin had no intention of launching a short war in Ukraine that would end quickly with total occupation and control of the country.

This is reflected in what US military affairs analyst William Arkin describes as Putin’s apparent restraint in not deploying Russia’s full aerial bombing capabilities. Despite extensive civilian casualties and destruction of civilian infrastructure, Arkin’s US military sources believe that Russian forces are deliberately withholding the full extent of their firepower, calibrating the levels of violence to “keep destruction and pressure at a very careful, just-bad-enough level to keep some advantage.”

This is consistent with the conclusion that Putin doesn’t want a decisive military victory in Ukraine, but instead is using it as leverage to reshape the regional geopolitical order by creating a state of permanent hybrid war in Europe, a boiling pot of instability. His strategic goal is to foster new conditions that provide Russia with a Ukrainian footprint by which to extend its regional influence through a combination of both overt military means and information campaigns over the longer term.

The idea is to create new facts on the ground in Ukraine – and potentially beyond – that will provide Russia with the ability to perpetuate sufficient instability at will, so that it can, when necessary, prop up prices of its key commodities, especially oil and gas, and derail access to critical minerals for the clean energy transformation for which both Russia and Ukraine are major suppliers.

In other words, we would be remiss to assume that these consequences were not already contemplated by Putin’s war strategists well in advance. The war in Ukraine, seen through this lens, is Putin’s last stand – a desperate effort using his only remaining tool, the Russian army, to shore up the remaining vestiges of declining Russian imperial power against the inexorable forces of global energy transformation.

The war has provided Putin with the boon of triple-digit oil prices, enriching Russian energy firms and bolstering Russian state cash reserves. It has inflated prices for critical materials for the clean energy transformation where Russia and Ukraine play a major supply role, such as nickel, copper, aluminium, palladium, neon and krypton. It has extended Russian military operations into a territory long-sought by Putin as part of a bid to consolidate influence over former Soviet states.

Putin’s actions show that with the wrong choices – clinging to a dying past – we might abort this better future before it can come to fruition, plunging the world into a new dark age.

But contrary to Putin’s fantasies, the ongoing transformation of the global energy system is not a process that can be bludgeoned into oblivion, confused by disinformation warfare or distracted by sleight-of-hand negotiations. It is being driven by fundamental economic factors. The diminishing returns and escalating costs of fossil fuel extraction are being outcompeted by exponentially declining costs and improving performance of energy and transport technologies. The EROI of renewable energy plants is already higher than that of fossil fuels, and continually increasing. In comparison, the hyper-expensive exploitation of remote fossil fuel resources in Siberia is economically unsustainable, even amidst triple-digit oil prices, simply because such expensive, low-quality energy cannot compete.

Although price spikes for critical minerals are immediately increasing Russian coffers and creating bottlenecks in EV manufacturing, they are already prompting industry and investors to seek new mining and manufacturing opportunities independent of Russian supplies. The upshot is that the global supply chain, too, is being transformed.

If Putin’s hope was to restore Russia’s glory as a world power, his war in Ukraine has achieved exactly the opposite: it is accelerating Russia’s loss of its most important markets for energy and minerals in Europe and beyond, amplifying the systemic processes already well underway that will culminate in the utter evisceration of Russia’s fossil fuel economy over the next decades.

Only if Putin can be convinced that the coming collapse of Russia’s fossil fuel empire is now accelerating because of his actions is there hope of ending this war drive.

Of course, the war in Ukraine hits home how this coming collapse will not be a pretty sight. Putin may see the grinding down of Ukraine as a jumping-off point to use conflict as a lever to keep the fossil fuel system alive for as long as possible on the back of perpetually high prices. If the Ukraine conflict fails to serve this purpose, the creation of further conflicts in other former Soviet states with important oil industry links may well remain an option in coming years. And even if Putin backs down today, the inevitable escalation of the Russian economic crisis as these processes unfold could spur further outbreaks of regional militarism.

As such, the war in Ukraine offers a taste of things to come, not merely in Europe. The same processes impacting Russia will affect the world’s other major fossil fuel producers. The next two decades will be a period of unprecedented geopolitical turmoil as a global order framed around the centralised control of fossil fuel resources unwinds at an accelerating pace. This is why Putin’s war was at first seemingly welcomed by many of the world’s autocratic petro-states.

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How to Stop Putin

But geopolitical turmoil is not the whole, or even the most central part of, the story. It is peripheral to a deeper reality: the global energy system is in a process of rapid transformation toward new, decentralised forms of renewable electricity that could allow us to transcend the conflicts and corruption of the industrial era.

We could create a future where brutal military repression and oligarchic concentrations of power are obsolete. And the fastest route to doing so more than any other mechanism to stop Putin’s war in Ukraine and beyond, is by accelerating the transformation of the global energy system and its supply chains.

Putin’s actions show that with the wrong choices – clinging to a dying past – we might abort this better future before it can come to fruition, plunging the world into a new dark age.

But what if we make the right choices? The emerging system will allow us to cleanly power our societies at a fraction of the costs of the incumbent system of extraction. It will pave the way for sustainable prosperity that no longer requires volatile supplies of dirty fuels centrally controlled by far-flung dictatorships.

Combined with unfolding transformations of our transport and food systems, we could usher in what Seba and Arbib call an ‘Age of Freedom’: one in which an advanced, high-quality lifestyle including clean energy consumption, transport needs, nutritional value, housing and education could be accessible to anyone for as little as $250 a month by 2030, based on the deployment of key, decentralised technologies that are scaling today.

This, of course, is a future where there is no need for Russian oil and gas, no need for a corrupt, centralised oligarchy, no need for an apparatus of repression that sends its citizens to fight futile wars to fulfil archaic fantasies about ‘great power’: this is a future in which neither the world nor even Russians themselves, have any need for Putin’s fossil fuel oligarchy.

This is a future that Putin fears the most – and which may well have played a role in the flawed calculus that inspired him to invade Ukraine. But we mustn’t forget: his fear is shared by many in Western corridors of power, who secretly and sometimes openly marvel at the wonders of oligarchic control.