soviet union oil production

In 1930, the world’s first oil field in the Arctic—Chibyuskoe—was discovered in the Republic of Komi. From what was said above, we could assume that these nations were leaning toward suppressing the substitution effect, the effect of which, through intensive adoption of alternative energy sources and energy-saving measures on the whole, helped them survive the periods of low raw materials incomes much more easily. The Soviet Union has been the world's leading oil producer since 1974 and the second largest exporter, after Saudi Arabia, since the war between Iran and Iraq sharply curtailed production in … In this case, it would have been even more exposed to fluctuations in world oil prices (as it used a more complex scheme of determining oil price when trading with allies: first, the moving average over five years, then—over three years; this enabled the leveling out of the short-term oil price fluctuations). 8 Michael Ross, Oil Curse: How Rich Oil and Gas Raw Material Deposits Shape Development of States (Moscow: Gaidar Institute, 2015), 359. At the end of the day, the country suffered a lot from this trade (see below for more details on energy exports). The Soviet Union had a relatively diverse economy compared to that of other oil dependent countries. This thesis is backed up by theoretical studies. However, available data (see table 1) shows that despite the rapid growth in oil prices after 1973, the share of investment in the energy sector decreased from 29.4 percent to 28 percent between 1971 and 1975, then stabilized and started growing only in 1978, reaching 38.6 percent in 1985. The incapability of governments to take steps to turn the resource curse from a liability into an asset became the biggest brain-teaser in the resource curse theory.20. Overall, a pattern in the Soviet Union’s oil output can be observed: the country began to explore oil in a new area when the output in the previous major area started to drop (it was often reducing faster than expected). But, as we already mentioned, the planned system was, firstly, unreactive in regard to making such decisions, and secondly, the viewpoint that domestic consumers are more important than foreign ones was still influential. We can’t discuss FDI in regards to the Soviet economy, but we know the following fact about the change in the country’s terms of trade: the purchasing power in 1988 of one barrel of Soviet oil, expressed in items of West German machinery, decreased to one-quarter from the 1985 level.18 A change in terms of trade like this is highly painful for the economy; it means that the country had to export four times as much oil in order to buy the same number of imported goods. Resources were delivered in the wrong composition, were presented in the wrong order, and then often used for a purpose other than that for which they were intended. The thing is, despite the economy’s high energy efficiency, its high level of economic development has led to the country consuming a great deal of oil, both by industries and households (thanks to the very high level of vehicles per capita), and it even had to import large amounts of oil. B. and Wohar M. E., “The Prebisch-Singer Hypothesis: Four Centuries of Evidence,” The Review of Economics and Statistics, vol. There were three sets of prices: wholesale prices of enterprises (producers’ prices); wholesale industrial prices, different from the producers’ prices as they included costs and profits of transport companies (plus the turnover tax in the case of refined products and natural gas); and end sale prices (differentiated by the type of consumers in the case of natural gas and electricity), which exceeded the wholesale industrial prices by the amount of costs and profits of trade intermediaries or distributors.65 The difference between end prices on refined products (gasoline, diesel fuel, lubricating materials, black oil fuel) or natural gas and the prices (on crude oil or natural gas) of producers was the main rent-extracting mechanism. When reflecting on whether the resource curse existed in the Soviet Union, it is important to determine the meaning of this term. Secondly, starting from the mid-1970s (and until the early 1980s), gas rent approximately equaled oil rent, and for many years after 1991 it was about twice as big as oil rent. G., and Barry Ickes, Bear traps on Russia’s road to modernization (Routledge, 2013). Gas made up 36 percent of the total energy output in the USSR; oil comprised 36 percent; and coal amounted to 20 percent.1. Gas was first extracted there in 1953. We should mention that the Russian government applied some of these measures in 2004, in particular, the creation of a stabilization fund and the struggle with the strengthening of the ruble (although it was not that successful, considering the fact that the dollar’s exchange rate dipped to almost 23 rubles, when oil was at its peak). But what if the principal volume of resource rent comes from the internal consumption of resources, rather than from their exports? There were two periods of huge growth: between 1974 and 1981 (from the start of the first price shock until the drop of prices after the second price shock) and between 1999 and 2008 (that coincided with the start of the Russian economy’s rapid recovery after the 1998 crisis), which were then followed by sharp downturns. . Oil production in the Volga-Urals region was growing fast and reached its peak by around 1975.36 However, afterward, its decline was steeper than expected. [citation needed], During the later years of the Soviet Union, most notably during the Brezhnev stagnation era (c. 1975-1985), Soviet authorities exploited fuel resources from inhospitable areas, notably Siberia and the Far East. The U.S.S.R.'s oil industry remains in disarray. Then, assuming that from each item of a resource, the consumers will be paid a subsidy ρ, the actual price of the producer is Pt = Pt – ρ. It has been shown that the more developed the economy’s production sector is, the higher the price of raw materials extracted in the country should be in order for the migration of resources to the materials sector to commence. Gas exploration, development, and distribution were centralized in the Ministry of Gas Industry, which was created in 1965. For some reason, the country’s economy became dependent on the extraction and export of oil and gas and, thus, on the highly unpredictable conditions of the oil and gas markets that the country was not able to significantly influence. 3 Translator's note: all tons (of oil, etc.) the Soviet Union faced the same economic crisis that the West had already en dured in order to allocate its oil more efficiently. The energy sector had been developing, first and foremost, in order to provide the military-industrial complex and heavy industry with resources and earn hard foreign currency to fund key import needs. But the explanation may be simple: by the mid-1970s, incentives to save energy started to disappear under the influence of oil and gas abundance. [8] This has led to a continued dependency on Russia for energy resources, by previous satellite countries. This methodology of estimating costs was adopted only in the beginning of the 1970s, but within two to three years it became clear that even these estimates were understated (it’s important to remember that while calculating the marginal cost of oil on the domestic market, one has to consider not only the cost of extracting an extra ton of oil, but also how much money this ton would have brought if exported). This is reflected in the structure and location of the nation’s capital stock, network of roads and railroads, size and type of enterprises, distribution of labor resources, and the types of fuel and minerals it uses. 85 Their product is the total efficiency of energy use (in this case — energy intensity of national income). Perhaps, the main factor is that the authorities in the 1970s didn’t understand the nature of the situation they faced. Nevertheless, the advocates of the second option included the ministers of the oil and gas industry and the geology minister, so this strategy won. This posed the question about whether the appearance of large oil and gas revenues had actually made the mentioned drawbacks of the planned economic system worse. In response to the rapid growth of the relative oil price, a technological boom started in the West that affected geological exploration and extraction of natural resources and the search for energy-efficient technologies and alternative energy sources. As the resource rent of a country often (but not always) weakly depends on its actions, it often leads to the above-mentioned “get-rich-quick mentality” among entrepreneurs and “boom-and-boost” psychology among politicians. Rather it was caused by an oil crisis. In the case of the modern Russian economy, the drop of raw material revenues is accompanied by the foreign policy crisis that led to a few rounds of sanctions (and countersanctions) against a number of sectors in the Russian economy and individual companies. However, the analysis should be prolonged to the present time, as another downturn started in 2014, the end of which is still unknown (some researchers think oil prices will never fully recover due to the technological revolution both in cheaper alternative energy sources and in oil and gas production.) 83 Energy intencity and energy capacity are considered synonyms in this context. In other words, should the costs of pipelines, geological surveys, and so on, be considered? The first wells were drilled in 1871-1872 and over 20 small oil refineries were active in 1873. This could be explained both from the viewpoint of rational economic behavior, when economic agents value the future less due to the increase of discount rates by the government, companies, and households, and this rate grows due to increasing uncertainty regarding the country’s future revenues from raw materials; and from the viewpoint of the behavioral approach to economic activity (which also increases due to the growth of uncertainty about the future). So, despite the stagnation, the Soviet Union under Leonid Brezhnev ( General Secretary from 1964 to 1982) moved from being an autarkic economy to a country trying to integrate into the world market. Yet communist inefficiency was in play when the Soviet economy and Soviet oil production were all increasing in the 1950s, 1960s and 1970s. By 1939, they dropped to 0.4 million tons. Firstly, most authors rely on the data of a small number of nations, which are different in many ways, not only in resource availability (usually, Brazil, Colombia, Mexico, South Korea, and Taiwan). But how would this affect the Soviet leadership’s incentives to diversify the economy? . In 1977, the CIA prepared a set of reports that forecasted, in particular, a decline of oil output in the Soviet Union to 400 million tons, which would have made the country a net importer of this resource.48 However, this forecast was far from reality (in 1987, the country produced 625 million tons49). Former Soviet Union oil production and GDP decline: Granger causality and the multi-cycle Hubbert curve Could the transition to a market economy have been carried out in an evolutionary manner, like in China, and not in a revolutionary one? 368 (1982): 825-848; Corden W. Max, “Booming Sector and Dutch Disease Economics: Survey and Consolidation,” Oxford Economic Papers, vol. Indeed, with the start of the resource boom in the 2000s, the government in Russia has started to rapidly strengthen, which is showcased by the Yukos case and the increase of the government’s participation in the oil sector. The growing returns on the invested capital and labor in the oil industry should cause a resource movement effect, and they did. [3] The policy acted on in the USSR affected the Soviet satellite-nations and - to a lesser extent - the entire world. At the same time, the hard currency received in return for resources was spent on current needs instead of the modernization of the economy. As the oil industry was the cash cow, its well-being was a priority. Surkov.”37, Thanks to the Beryozovo oil blowout, the presence of oil and gas in the Western Siberian Plain was proven for the first time. Modern Russia should remember the harsh lessons taught to the Soviet Union by oil and gas dependence. In this case, the annual oil production growth rate of 8.8 percent doesn’t seem too big (and assumes that the energy intensity of industrial production should have grown a little). . The modern Russian economy, although under pressure from government intervention, is still qualitatively different from the Soviet economy. But the Soviet Union conducted “classic” import substitution policy without constantly increasing the requirements for the subsidized enterprises to increase exports (as in the case with most East Asian nations) and closing inefficient companies. In a planned economy, there was no financial market in the modern sense (there was a fight between different ministries, authorities, and regions over maximizing their shares in the distribution of resources). 29 See for instance: Jeffrey D. Sachs and Andrew M. Warner, “Natural resource abundance and economic growth,” (National Bureau of Economic Research, 1995) no. In exchange for energy resources, the Soviet Union would receive first-world technological developments. It should be noted that according to credible Soviet estimates, energy intensity of production was falling (see table 5).83 But instead of GDP or GNP, they looked at national income (it was growing faster than GNP, as it doesn’t include social expenses and services, which grew slower in this period).84 It can be seen that over two decades, the energy efficiency of the USSR’s national income decreased by 22 percent. That’s why technological rent doesn’t fluctuate as much as resource rent at the aggregated level. All these mechanisms could be divided between the purely economic and the political-economic. 46 Data on output, exports and consumption from: “Handbook of International Economic Statistics 1992” (Washington, D.C.: Directorate of Intelligence, September 1992), Tables 36, 37, 38, 43 (as cited by ) Цит. This is what is left for the owners of an enterprise. In this regard, it seems feasible to provide for a reserve for possible extra oil supplies of 5-6 million tons over the five years when a new five-year plan will be developed.”106 There is a lot of evidence that, by the beginning of the 1980s, the Soviet Union developed a strong dependence on oil and gas exports. According to geologist John Grace, “the Soviet planning system had nothing to do with it; it was just a reflection of the Gauss distribution of the size of deposits observed around the world.”64. [3], The Politburo, or main policy-making group in the Soviet Union, provided policy-makers a general outline to guide national policy. During World War II, there were no exports; in 1946–1949, exports were also almost nonexistent (0.5–0.9 million tons), and they only slightly exceeded 10 million tons in 1956.93. Its development started in the same year. This group consisted of Top Soviet Leaders and was headed by the General Secretary. Mikhail Gorbachev, the last Soviet leader, seemed to realize that the state energy policy was one of the main causes of economic problems. [7] This created an efficient and effective route to transport liquefied natural gas (LNG). Moreover, in the mid-1960s, many experts working in Gosplan and the oil and gas industry did not expect that this could happen at all. Considering that about 70 percent of the produced oil and 87 percent of gas were consumed domestically at well below world prices, the main share of oil and gas rent went to prop up the industries that were uncompetitive on the global scale. The desire to quickly explore this huge region and get maximum returns with minimal costs has led to the situation in which the issues of long-term infrastructure planning were not paid the attention they needed.”57 The emphasis on the second option—the intensive one—has paid off (from the medium-term perspective, up to the beginning of the 1980s). Figure 4 below represents oil and gas rent in the USSR and Russia between 1950–2010 (in 2011 prices). 36, no. The USSR was no exception in providing energy subsidies to domestic energy consumers; such a policy is widespread among nations rich in oil and gas. We can assume that this would diminish the loyalty of these nations and make them start market reforms earlier than they did. The appearance of huge new oil and gas deposits made it possible to postpone the transition to more efficient energy use further and further. mentioned in this paper are metric tons. 22 See, for instance, Charles Tilly and Mancur Olson, The Rise and Decline of Nations: Economic Growth, Stagflation and Social Rigidities (New Haven: Yale University Press, 1982). The USSR’s population was much bigger than Russia’s, almost 242 million in 1970 and 292 million in 1991,118 which is 68 percent and 103 percent higher than the Russian population in 2014.119 This means that oil and gas output per capita was much smaller (2.12 tons/person per year in 1989 against 3.72 tons/person per year in Russia in 2016).120 At the same time, in the 1970s, about 80 percent of the Soviet Union’s earnings in hard currency came from oil and gas, which can be compared with modern Russia. As for the resource dependence of the Russian economy, it is another topic that needs separate research. At first sight, the change of trend in 1975–1980 is unusual: energy consumption had been growing much faster than GNP. Evidence of this is the wide energy efficiency gap with Western nations, although it was considerably reduced after the crash of the USSR. 58 G. Vakhitov, “Half of century of Domestic oil Production: from Soar to Crash,” in Oil of the Soviet Nation: Problems of History of USSR Oil Indistry (1917-1991), edited by V. Alekperov (Moscow: Russian Academy of Natural Sciences, Oil and Gas Section, 2005), 513 (as cited by Shafranik and Kryukov, 151). . Secondly, the problem of low economic growth rates is considered to stem from high trade barriers. Even the oil and gas complex was suffering from the never-ending shortage of necessary resources and was highly dependent on imports of many investment products. And their physical volume increased by thirty-eight times.108]. Starting from the mid-1980s, the oil and gas sector, on the one hand, became the main source of the Soviet economy’s vulnerability, and on the other, despite this, the main hope for receiving hard currency. See also Campbell, 5. In 1989 (the last year for which comprehensive data is available), total energy production, including oil, natural gas, coal, hydropower, and atomic energy amounted to about 21 percent of the world’s total production, as opposed to the United States’ 20-percent share. This also means that sales would plummet both domestically and abroad if the subsidies stopped, and this would lower the overall volume of rent. As a result of concentrating efforts in the Priobye area in 1961, a powerful oil gusher was found near a settlement called Megion, which launched the big oil period in Siberia. . Energy is the necessary basis of any economy, and the Soviet Union in the late 1980s was the world’s biggest oil and gas producer and the third-biggest coal producer. As oil drained from the Soviet machine, the nation’s stability morphed into Russian chaos and a … Procurements of meat from abroad increased by 5.2 times: from 164.9 thousand tons in 1970 to 857.5 thousand tons in 1985. This situation can be analyzed in the categories of the substitution effect and the income effect. The political-economic mechanisms of the consequences of resource abundance are not as well known and not as empirically backed up as purely economic mechanisms. (Under Putin it has returned to 10-million barrels.) This example shows that the raw materials sector can lead to even more negative external effects by causing huge ecological damage to areas with a fragile ecological equilibrium. However, in 1980, output was 188 million tons; it fell to 135.5 million tons in 1985, and only 109 million tons in 1990.54 But what is even more important than how it was falling is the fact that it was doing so faster than the authorities expected (experts started to point toward negative trends in the mid-1960s55). 36 (November 1984): 359-380. This can be explained considering that most of them stopped receiving energy subsidies from Russia. Social explanations can be used to describe the negative effect of the military-industrial lobby in the Soviet Union on the distribution of resources—first and foremost, the most scarce ones—between the industries, including to spell out why there were not enough resources to diversify the economy and boost the efficiency of the oil and gas complex. This assumption is very important since if oil and gas production efficiency (calculated as the percentage of material actually extracted from deposits) approached Western standards, output would grow much faster. 91-125 (Washington, D.C.: International Monetary Fund, 1991). 26 June, 1987. Gorbachev himself was unable to break the policy, which began under Brezhnev, of a rapid growth of investment in the fuel and energy complex and the inability to introduce energy-saving policy. Here, we would like to conduct an in-depth analysis of the origins and progress of the Soviet Union’s oil and gas dependence in order to reach a deeper understanding of its parallels with the oil and gas dependence of modern Russia. Between the beginning of the twentieth century and 1974, the country was the world leader in oil production, but it was never mentioned as a nation that suffered from the resource curse. Bornstein (1985), Chistovich (1990), and Nove (1986) single out the following reasons why the use of energy was inefficient in light of nature of the Soviet planned economy7: (a) the heads of enterprises did not have incentives to minimize production costs; (b) energy caps and the distribution of energy led to an excessive use of energy; (c) technological progress was suppressed by the lack of incentives to innovate and the fact that any changes could lead to problems in receiving new resources and higher risks in achieving production goals; (d) exclusive production of multiple goods by one enterprise meant that the goods were always in demand, regardless of their features; (e) construction of a large number of apartments in the 1950s and the 1960s led to the situation where their quality and energy features were less important than the volumes of construction; and (f) it was meant a priori that large central heating systems had no alternatives, and systems that were potentially more efficient were never considered. On the whole, we can see that gas rent was a much more stable part of the total rent than oil rent. Along with this, the share of oil and petroleum products over the period between 1950 and 1980 was more than 80 percent (in the second half of the 1970s, gas exports started to grow quickly and their share in the total value of exports in 1980 amounted to 16 percent).98 According to alternative (Western) estimates, the share of energy resource exports in the total volume of their production reached 7.1 percent in 1960, 11.9 percent in 1970, 15.8 percent in 1980, and 16.7 percent in 1988.99, The hike in world oil prices was affecting the Soviet oil industry slightly differently than other oil-exporting nations. These deposits had extremely high well-production rates of over 100 tons per day (during the second half of the 1970s and the 1980s, they began to plunge, resulting in two severe oil production crises in the USSR). The Soviet Union had to encounter the volatility of both oil production and the demand for it. However, just because a system can change, does not mean that the old system did not endure peak oil, it did. Energy resources remained the backbone of the Soviet economy in the 1970s, as seen during the 1973 oil crisis, which put a premium on Soviet energy resources. During low-price years, such as the end of the 1990s, the rent was significantly below the baseline scenario. 30 Daniil Yergin, Extraction: World History of the Fight for Oil, Money and Power (Moscow: DeNovo, 1999), 44. [9] This has incentivized Russia to continue Influencing the political agenda of Ukraine and other former USSR countries. [7] This political decision was not accepted easily. Other huge deposits were explored shortly after this, including the immense Samotlor field in 1965 (it was rapidly put into service; the first industrial well was completed in April 196840). Data by the Customs Revenues Department for various years (as cited by Goldman, 5-6). The lack of transparency in these mechanisms was very handy for the Soviet government, as it allowed it to attribute economic and social successes to the “advantages of the Socialist system,” rather than to the profits from using cheap natural resources. The high price combined with fast-growing production of oil in Western Siberia provided the Soviet Union with unprecedented revenues. The developed gas fields were so huge that the marginal cost of exploring them was minimal. The government (represented by the State Committee on Prices, interacting with industry-specific ministries) was setting domestic prices in the Soviet Union for extended periods of time. We can assume that the Soviet authorities would have to reform the country much sooner if there were no high resource revenues. In the first half of the 1960s, two main strategies were subject to debate regarding the further development of the country’s oil and gas complex. 11 About mechanisms of the ‘Dutch disease’ see: Corden W. Max and J. Peter Neary, “Booming Sector and Deindustrialisation in a Small Open Economy,” Economic Journal, vol. 103 U.S.Bureau of Mines, Mineral Yearbook 1986 (Washington: U.S. Bureau of Mines, 1986), 859. Despite the differences in the presented estimates of Soviet oil and gas rent, it’s clear that in the second half of the 1980s, it sharply declined, making the USSR’s economy less and less stable. For instance, at a Politburo session in May 1984, then premier Nikolay Tikhonov said: “The oil we sell to capitalist nations mostly goes to pay for alimentary and some other goods. The first scenario can be considered moderate. Available data shows that during the 1970s and 1980s, imports of a range of goods increased. 23 Evans, Peter, Embedded Autonomy (Princeton: Princeton University Press, 1995). First, oil and gas rent was fluctuating heavily. Washington, DC 20036-2103. The example of the increase in production and the exhaustion of the Volga-Urals oil-and-gas-bearing region during the Soviet era shows how unstable oil production can be. But instead, it started exporting even more oil! Thus, potential rent exaggerates the total amount of rent. The Soviet Union endured a peak in oil production within its particular system. That’s why cheap energy supported the huge, by international standards, but very energy-intensive military and industrial complex. During high-price years, according to the authors, the difference was no more than 10 percent.72, Now, let’s take a look at the estimation of the Soviet oil and gas rent, calculated in Matthew J. Sagers, Valery Kryukov, and Vladimir Shmat (see table 2).73. This is a change of -0.59% from one year ago. 96 Net energy exports are exports minus imports of energy. [3] The lack of winners and losers amongst Soviet companies led to a pattern of USSR enterprises lacking innovation in drilling techniques. In the same way, the cost of production is not the reported cost of production at any moment of time, but the cost that could have been established under the efficient organization of the industry, i.e. For instance, as the planned numbers were usually set in units of a physical quantity, the number of meters drilled was a reasonable indicator for geologists. 1, 170 (as cited by Slavkina, 262). Gaddy and Ickes consider that the first assumption about the slow substitution of low-cost deposits by high-cost ones is true.69. Started to decrease much earlier the high price combined with fast-growing production of resources! The winter, when it was a stagnation in Soviet economic science: http: // &. 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