Twilight of the Petrostate

Petr Aven, Vladimir Nazarov, Samvel Lazaryan

Economics, Russia, Persian Gulf, Venezuela

The age of oil rents is over. A political and geopolitical revolution is on its way.

About twenty countries around the world are dependent on a single number: the price of oil. Some, primarily Persian Gulf states, live entirely off their oil and gas wealth. They rely on crude oil, natural gas and petroleum products for 50 percent of their Gross Domestic Product and for 70-plus percent of their budget revenue. Some 15 countries generate more than 50 percent of their export earnings from oil, gas and petroleum product sales.

Oil-producing countries have been living a dream. In recent decades, most oil-producing countries saw their per-capita GDP not only expand but show a rate of growth above the global average. In other words, they were getting rich faster than the rest of the world. In terms of dollar-denominated GDP per capita, as crude prices peaked in 2011 Russia and Kazakhstan outstripped Malaysia and Turkey; Saudi Arabia and Equatorial Guinea nearly overtook South Korea; Kuwait shot ahead of Great Britain, while Qatar rose to rank as one of the three richest nations. The new generation of the petrostates' political elite has come to look on oil rent as a means to achieve all its goals. And yet, many experts will call the oil windfall a curse, not a blessing. A prosperity that is due to the sheer accident of owning large mineral resources rather than to technological prowess, investment and hard work has its downsides, including the degradation of political systems, the throttling of competition and the proliferation of populist fiscal policies.

An awakening from this dream is now inevitable. The future holds challenges for those countries that have cast their lot with the global oil market. There is little doubt that oil's transformation into an ordinary, non-rent-generating commodity is going to change the world.

The Invisible Hand against the Petroleum Leviathan

Over the course of human history many rent-generating commodities capable of enriching their owners have turned into ordinary products. Pricing becomes determined by production costs rather than scarcity value. The readiest example is land, which has seen the rent component of its price steadily decline over millennia and has thus gradually ceased to be the main cause of armed conflicts. Other cases include furs, which generated rent for Russia into the eighteenth century, and natural rubber, which fed the Amazon boom in the early 1900s.