Demographic shockwaves

In the end of June, a conference on the consequences of demographic change for Russia took place in the German Council on Foreign Relations (https://dgap.org/en/node/28296). The invited demographers, political scientists and economists touched on a large variety of possible developments, consequences and policy measures, but there were some facts that stood out to me. As I am currently working on a more thorough conference report, I will "leak" some findings I find interesting beforehand.

Maybe the most stunning (and worrying) development in Russia is the forecast for the number of women in the "childbearing age". In Russia, the mean age of mothers at the birth of their first child was 24.6 years in 2009 (it is slowly increasing). This means that the majority of children are born when their mothers are in the 25-29 year age cohort. In the next ten years, the number of Russian women in this age cohort will fall - by half!

Source: World Population Prospects 2015

One reason for this sharp decline is the peculiar shape of the Russian age pyramid (at the conference it was referred to as the "Christmas tree" by Ekaterina Schulmann). The background is, on the one hand, the echo of the second world war: The grandchildren of the wartime parents are in the childbearing age today. This effect is, on the other hand, exacerbated by the lower birth rates in the 1990s which were due to the economic and social turmoil in the first years after the perestroika. The good news is that there will be a moderate recovery after 2025.

Of course, this trend also applies to the male population. In total, the drastic fluctuations lead to enormous challenges for the labour market and the pensions system. Currently, the ratio of Russians entering retirement age to Russians entering working age is 2:1. The workforce will shrink by about 8 million in the next 15 years. The consequences are also felt in the education system: Kindergartens, schools, and universities have to deal with the number of pupils and students doubling and halving again in a matter of a few years.

 Source: http://populationpyramid.net/russian-federation/

Does the Russian government have the resources, both economically and politically, to deal with the upcoming changes? At the moment it does not look that way, as the Kremlin is dodging pressing but unpopular reforms while prioritising foreign policy. This is why demographic change in Russia is a little bit more worrying than in other countries (such as Germany) where similar trends can be observed.

How fracking made the oil price predictable

Predicting the future oil price used to be an ungrateful enterprise. Because the demand and especially supply of oil has been inelastic in the last decades, even slight changes in demand (e.g. through growth of the world economy) could lead to drastic increases or decreases of the oil price.

Although fracking only makes up for a small part of the international oil supply, it increased the supply elasticity between $50 and $100. In addition to huge low-cost oil production sites in Saudi Arabia, Russia and elsewhere, the market now features a large number of small fracking sites with a higher and more diverse cost structure. Variable costs are higher for fracking than for conventional oil production, and investment cycles are shorter.

This means that when oil prices were to reach 60 dollars per barrel again, "hibernating" production capacities in the US will be reactivated, increasing supply and dampening the price. Over time, with continuing development of fracking technologies, the elastic part of the oil supply curve will become flatter, slowly lowering the oil price or compensating for increasing demand.

Of course, the underlying assumption to this is that OPEC or other oil cartels will not artificially reduce their production. However, this assumption is realistic, as OPEC has shown that it suffers from strong collective-action problems and diverging interests. In addition, the conventional oil producers have realised, that reducing their production would only facilitate the further development of fracking. For Saudi Arabia, keeping output high and the price at a level around 50 dollars is the best choice.

The result is an oil price that will most likely not rise above 70 dollars in the next five years. What does this mean for Russia? At the current level, the government is forced to continue drastic austerity if it does not want to burn up the relatively small reserves. The Russian recession will most likely end next year, but economic growth will not return to previous levels. Until 2018 (the next presidential election) the imperative is clearly to limit the pain that is inflicted on the Russian population, especially pensioners. Then, living standards will continue to deteriorate and certainly not return to pre-2014 levels. The most drastic changes are awaiting the pensions system, because a large generation 60-year-olds is currently leaving he labour market while a tiny generation of 20-year-olds is entering it.