From the Soviet Union to Putin's Russia

Posted on May 06, 2008
Posted By: Alan Caruba
 
When the government of the Soviet Union collapsed in 1991, the fall was attributed to all kinds of reasons. There was the failed invasion of Afghanistan, the symbolic fall of the Berlin Wall in 1989, and, after some desperate efforts by Mikhail Gorbechev, Communism as a guiding principle and economic system simply imploded. That’s the thumbnail version that passes for history, but Michael J. Economides and Donna Marie D’Aleo have another answer and it’s one you may not want to hear.

“In the second half of the 1980s the Soviet leadership came face to face with the problems that arose as a result of the dramatic drop in oil prices, and the necessity of increasing the volume of capital investments in western Siberia’s oil industry. They failed to provide adequate solutions to these problems. The consequences were a rapid decrease in oil production, a collapse of the consumer market, a growing deficit of the most basic consumer goods, and the bankruptcy of the Soviet Union.”

“From Soviet to Putin and Back: The Dominance of Energy in Today’s Russia” by the two authors cited above is not likely to leap on the bestseller lists, but for anyone who takes a serious interest in America’s future and in current world affairs, it is the book to read, not only for its excellent history of the rise and fall of the Soviet Union, and what replaced it, but for its unique insights regarding the role of energy.

Economides is Editor-in-Chief of Energy Tribune, a magazine for those who understand that (1) energy is the master resource, (2) is the primary force behind the rise of human civilization, and (3) is the grand determinant in geopolitical affairs. From our earliest times when muscle power was the only source to the modern era, energy in its many forms has ruled the affairs of man.

Donna D’Aleo’s expertise is world affairs with an emphasis on Russia. When seeking the most fundamental cause for the collapse of the former Soviet Union, we need look no further than “the fall in international oil prices and miscalculations in the strategy for developing the deposits in western Siberia.”

Oil has been critical to the comeback the Russian Federation has made and one must pause at this point and ask if anyone in the United States Congress or the White House has a really good reason for restricting access to our nation’s known reserves of oil in Alaska, as well as the unexplored and untapped reserves in 85% of our vast coastal shelf. This question applies as well to natural gas whose cost is rising too.

Being stupid or incompetent or both when it comes to having a national energy policy can bring a nation to its knees. When you add in profligate spending, a needless war in the Middle East, and a currency whose value is in free fall, you are essentially looking at the conditions eerily similar to those that faced the Soviet Union in the 1980s.

Our current national energy policy focuses on alternative means of providing electricity such as highly subsidized solar and wind power; ways to reduce gasoline use by mandating that ethanol be added or a formulation called biodiesel be used; demanding that autos and trucks get more mileage from a gallon of gas while ethanol actually reduces mileage, among other astonishingly insane notions that include a ban on the purchase of incandescent light bulbs.

All this has occurred at the same time that several states have opposed the building of coal-fired electricity generation plants and while the federal government regulates the building of nuclear plants down to a snail’s pace. Coal, cheap and abundant, powers over 50% of America’s electricity. Add to this the difficulties imposed on building any new refineries (none since the 1970s) or pipelines for oil and natural gas, the United States is essentially committing energy suicide.

By the time the Soviet Union collapsed “oil was the country’s only major source of hard-currency revenue” and its management from Moscow was so deficient that the entire political and economic system literary self-destructed. “By proceeding without concern for conservation and efficiency, the Soviets fell behind technologically and economically.”

When OPEC decided to rebuke the United States in the 1970s by reducing its oil exports, the gas lines at service stations shocked Americans, but by then the nation was no longer an exporter of oil as in the heady days of Texas and Oklahoma oil fields. There was a major power shift to the Middle Eastern nations sitting atop some of the world’s greatest known oil reserves. The loss of our ally, Iran, in 1979 further exacerbated our reliance on foreign oil.

Since the United States imports a great deal of its current oil needs from Canada, you would think that Congress would not want to impede oil retrieved from that nation’s tar sands, but you would be wrong. It has passed legislation against its purchase by our military because it is deemed to be environmentally improper.

While Russia waited for its president, Boris Yeltzin, to sober up the Soviet economy stagnated “and then it experienced negative growth, a situation that lasted for the next ten years.” As 2000 dawned Yeltzin resigned and put Vladimir Putin, a longtime member of the Soviet security and intelligence apparatus, in charge of the nation.

The story of the rise of the Russian oil oligarchs who privatized and revived the industry is a fascinating one, but the way Putin and his former KGB colleagues forced out those who opposed them and stole the assets of Western oil companies who had been induced to invest millions, if not billions, in the development of the vast Siberian reserves, is dramatic and told in detail by Economides’ and D’Aleo’s book.

Facing imprisonment and even death, some of the initial billionaires who choose to oppose Putin and friends either fled or, indeed, found themselves in prison on trumped up charges. Several murders of others, like crusading journalist Anna Politkovskya, appalled the international community, but by then former intelligence operatives had seized the Russian oil and natural gas industry. “Fully 80% of Russia’s leading politicians were former intelligence agents.”

Russia’s dominance in oil and natural gas is now being used “to project hegemony over its neighbors, from the Far East (energy-starved China and Japan) to Europe in the west, and attempting to control transit (pipeline) countries such as Ukraine and Belarus.” Communism, Soviet-style, is back in power in Russia under Putin while America “has been helplessly watching Russia’s re-emergence.”

At the heart of this new threat to America’s role in the world is oil and natural gas. Unless Americans begin to understand the geopolitics of energy—and soon—a lifestyle we have taken for granted is going to be severely impacted.

This explains why we have 160,000 troops in Iraq in a vain attempt to have some sway over its oil industry, why we have carrier groups parked just off the Persian Gulf fearing a nuclear-armed Iran, and why we will sell Saudi Arabia any military hardware it wants while continuing to guarantee the sovereignty of oil sheikdoms like Kuwait and the UAE.

What it does not explain is why our government has done everything in its power to thwart the exploration, discovery, and extraction of our own energy assets.

 
 
Authored By:
Alan Caruba is the founder, in 1990, of The National Anxiety Center, a clearinghouse for information about "scare campaigns" that are designed to influence public opinion and policy. The Center maintains a website at www.anxietycenter.com. These days he is best known for his blog "Warning Signs" (http://factsnotfantasy.blogspot.com) that has recently
 

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Comments

May, 06 2008

Ferdinand E. Banks says

What you call projecting hegemony, Alan, goes by another name at Harvard and Stanford. That name is business. And I can't really understand this obsession with Alaskan oil. Isn't it likely that if there was as much in that state as you think, it would be available for exploitation today? I also don't believe that a book by Professor Ecomides and his co-author has a place on my coffee table - at least if your review captures its spirit.

Outside of that however, I think that there are a few observations in your contribution that I can use in my song-and-dance in Paris later this month, because as someone pointed out somewhere, if the energy intensive countries do not come up with a comprehensive and coherent energy program soon, we will find ourselves confronting some very bad news. The question is however IS THE MARKET CAPABLE OF CREATING THIS PROGRAM? I'd really like to see some work on this, or read some comments that go into details, because on the basis of your article Mr Putin didn't wait for the market to work its magic, and it might turn out that another decade or so of Putinism will make Russia the rich or quasi-rich winner that it could have been earlier.

Fred

May, 06 2008

Len Gould says

Alan: Perhaps you failed to read your own quote. (?Professor Ecomides and his co-author?)

“By proceeding without concern for conservation and efficiency, the Soviets fell behind technologically and economically.”

Also, a question: How much larger than the lately mandated increased Strategic Petroleum Reserve is the guaranteed production of ANWR? Is it sensible economically to develop a second Alaska Pipeline for ANWR os simply require its development to wait until the existing pipeline has sufficient spare capacity for it?

May, 06 2008

Xuguang Leng says

"among other astonishingly insane notions", should we add "extend the Day Light Savings Time"? There are studies show Day Light Savings Time actually costs more energy than Standard Time. Plus having all the little kids waiting for school buses in the dark.

May, 06 2008

Bob Amorosi says

Since oil prices are steadily climbing, now at $120US per barrel, all oil companies everywhere are making record profits WITHOUT having to spend heavily on exploration or developing more production capacity. It's basically the same as in any other capitalistic industry; if my product is enjoying record profitability, growing demand, and no serious competition threats, I have less motivation to invest in new exploration to develop the resources to increase supply, or to develop any new products.

Alan’s outlook is basically correct in that North American consumers have barely begun to feel the growing economic pain coming. There is a huge wealth drain happening from North American consumer’s pockets, much of it to the OPEC companies, and this situation probably wont change until substantial declines happen in supply availability, or if demand is heavily curtailed in the future for example if the automotive industry markets affordable widespread electric vehicles.

May, 07 2008

Len Gould says

Detroit Free Press (AP Newswire) (QUOTE) NEW YORK — A Goldman Sachs analyst today predicted that oil prices could reach $150 to $200 a barrel over the next 6 months to two years, but said that how far prices could climb still "remains a major uncertainty."{/QUOTE)

May, 07 2008

Len Gould says

Someone mentioned to me this morning having seen a gas station advertising regular at $1.249 / litre ($4.75 / gal)

May, 08 2008

Jim Beyer says

Although nuclear opponents may not like this or appreciate this comment, the "fallout" from Chernobyl also had an impact on the downfall of the Soviet Union.

May, 09 2008

Len Gould says

(QUOTE) Washington, May 04: Saudi Arabia has said fears that the world may run out of oil in near future is unwarranted with hydrocarbon equivalent of 14 trillion barrel of oil still undrilled and suggested a mechanism to protect prices from non-industry depredations.

Oil minister Ali al-Nuaimi speaking at a joint appearance with US Energy Secretary Sam Bodman at the Center for Strategic and International Studies (CSIS), said yesterday " I believe there is 14 trillion barrels of oil reserve in the world, and with the advanced technology, we are exploring more oil fields". (/QUOTE)

Zee News Saudi Arabia

That's an incredible figure, 50x S Arabia's "stated" reserves, which many on eg. theOilDrum.com think are already overstated. 10x even the theoretical max. content of Canada's oil sands, 100x the most recent booked reserve. 10x total cumulative world production to date, with most large areas already in decline. Where are all these future discoveries supposed to be made? Such ridiculous attempts to talk down the price of oil simply have the opposite effect, indicating irrational hysterical fear at the highest levels.

May, 09 2008

Jim Beyer says

"Choco rations have been increased to 25 grams per week, up from 30 grams per week." (1984)

May, 09 2008

Len Gould says

Is that an Orwell reference? Good book. Today my usual "deep discount" station was selling at $1.249 / litre. Word travels I guess.

May, 11 2008

Todd McKissick says

Is it worth investigating the tie between traders and oil profits? I can't seem to figure out exactly where the extra money is going for oil. Oil company profits are breaking records every quarter, but isn't the 'price of oil' that we all quote actually the price they have to pay? If that's true, which seems logical, then they must be maintaining a percentage markup to grow their profits. This means that today's $126 price for each barrel is going to the supplier - OPEC. I have no idea what portion of the gasoline price is made up from the oil feedstock, but it can't be that much because it seems oil has risen more than gas recently. For example, last year, we paid $3.30 while oil was at $70. This year, we're paying $3.59 with oil at $126.

While I don't know the detailed answer to the above question, one thing seems absolute. We need a competing energy source. I personally don't care one bit if it's because of global warming or peak oil scares or environmental disaster. We need to give the market a choice to compete with against this oil monopoly we're stuck in. Monopolies are bad enough, but they're usually regional. Oil is a fully global oligopoly which reaches every corner of the world. I would hate to see anything resembling accuracy in a report of what the total costs are, worldwide, for all aspects of this anti-competitive market.

May, 12 2008

Jim Beyer says

Todd,

I think the oil companies have access/control over some reserves, so the oil companies get at least some of that increase. I've also heard that heavy trading activity has driven the oil price up an additional $20 or so, as it has with grain prices. In theory, this should settle down after awhile if the market feels it understands what's really going on.

I'm not an expert on this, but I think the extra $20 (for example) we are paying for a barrel NOW reflects the uncertainty of what the market thinks the barrel might cost 6 months from now.

May, 13 2008

Bryan Suszek says

Len, from your first 5/6/08 comment, you apparently communicate that you do not know the capacity (maximum pumping rate) for the Trans Alaskan Pipeline. If you did, you would not have written "Is it sensible economically to develop a second Alaska Pipeline for ANWR os simply require its development to wait until the existing pipeline has sufficient spare capacity for it?" Do you know the peak throughput rate on the line was well over 2 million barrels per day and today throughput is only 800,000 barrels per day? You philosophical beliefs come through clearly in your statement. Written like a true command control socialist.

Further, the SPR was developed to offset shortages in oil supply to refineries. The SPR has less than 2 months of supply if oil could be withdrawn from the reserve at the current US refinery feed rate of about 15 million barrels a day. The SPR should not be used to offset the price of oil. Remove the shackles put on by ignorant command control freeks who think they know how everything should be done.

Bryan Suszek

May, 14 2008

Len Gould says

Bryan: "Written like a true command control socialist." -- you guys slay me. Like you know anything about historical political philosophy. I've never in my long life voted anything but conservative, simply stopped voting when the "neo-con" (fascists) overthrew decent small-c secular conservatism.

May, 14 2008

Jeff Presley says

Point of correction. I've posted this multiple times elsewhere on energypulse but that $120/bbl number being bandied about refers to a SPECIFIC oil, specifically West Texas Intermediate. Your mileage may vary, and the price YOU get for that oil coming out of the ground on your south 40 well might indeed be substantially lower that WTI, based on sulfur and nitrogen content among other elements problematic to the refineries. The big oilcos are on both sides of the equation, buying oil on the market to fill their refineries while also selling to the other oilcos for their refineries.

The difference between collapse and riches for the Soviets had more to do with the price of oil going up by 1600% than any great miracle of economics by Putin. In '98 the GOOD stuff was less than $10/bbl, so the bad stuff was going for as low as $2/bbl. Now that the good stuff is $120/bbl, contracts are being rewritten for low grade oils at $80-$90/bbl, which is pretty good for those producers. Upgraded Athabasca bitumen is actually better than WTI for chemical reasons, so sells at par with WTI.

The great unwashed public keeps thinking all oil is the same, just like all electricity is the same. In point of fact, the opposite is true, all oil isn't the same and the alchemists at the refineries can only handle so many bbls of Saudi sludge, which needs to be mixed in with nice sweet WTI or Nigerian or Brent crude to make reasonable quantities of gasoline, naphtha and diesel. However, they've been working on these problems for literally generations, so have it down to a pretty fine art. They could be doing better, but the EPA made is so that if you so much as paint a door of a refinery, that counts as an "upgrade" so now the entire refinery has to be retrofitted to meet newer air quality and other standards. That's about $1billion per refinery, which is why you see so many of them with peeling paint. It is also why we haven't seen a new refinery in this country for about as long as we haven't seen a new nuclear plant.

Turns out the government IS good at some things, like halting progress.

May, 14 2008

Bryan Suszek says

Len,

If you do not research a subject before writing about it, DONT WRITE ABOUT IT. You clearly did not know about the capacity or current throughput of the Trans Alaskan Pipeline. By using the phrase "neo-con" (facist) you clearly give yourself away. Liberal hiding himself in a Conservatives Clothes.

May, 14 2008

Len Gould says

Bryan: I'll grant you're right on TAPS capacity. "Oil and gas production in Alaska has decreased an average of 4.49% each year for the past 16 years." Crap, even Alaska's past peak oil. Ok, I'll agree. Start opening up ANWR with the least damage to the area, I'll have no complaint. Just understand how little oil that is in the big picture. BTW, I have read extensively on Alaska oil, just not up to date. Thanks for the correction.

And your labeling me to distinguish me from present poitics I take as compliments Statements which distinguish me from this current bunch in power are appreciated. Thanks.

May, 14 2008

Len Gould says

Jeff: "the EPA made is so that if you so much as paint a door of a refinery, that counts as an "upgrade" so now the entire refinery has to be retrofitted to meet newer air quality and other standards. "

Completely agree with your position on that. "Grandfathering in" old polluting industry like refineries and coal generators until they do a "major upgrade" is stupid, and should never happen again. From now on, industrial site found to be polluting their surroundings should simply be given a short deadline to fix it, or be put down immediately without compensation.

May, 14 2008

Len Gould says

SuperTramp: The Logical Song (Breakfast in America album, 1979) "Watch what you say, they'll be calling you a radical, a liberal, fanatical criminal"

May, 14 2008

Jeff Presley says

Len, Yup, old polluting industries like bread plants, which have to meet new stringent air quality standards that have put hundreds of them out of business. You know, that wonderful smell when Grandma is baking bread? Watch out, the EPA says it's illegal. Fanatical comes to mind, along with other words not germane to a public forum.

May, 15 2008

Todd McKissick says

Jim, So if what you're saying is correct, and Jeff somewhat supports it as well, then in roughly 6 months we're almost guaranteed to see the price of gas rise equal to the latest rise in oil? On a percentage basis, that would be (using my supplied numbers) $5.94 - $6.46 / gal with oil the same. Holy cow.

How much extra trading rise does everyone think there is due to instability (war, terrorist acts) in the Mideast? If that settles down, could they drop whatever increase was caused by that?

Jeff, If the good stuff went up 1600%, wouldn't that mean the cheap stuff goes up a 'somewhat' similar %? What percentage of gasoline's price is made up from raw oil's cost?

May, 15 2008

Jeff Presley says

Todd, the price of WTI hasn't quite gone up 1600% since '98, but the price the Russians get for THEIRS has. Different starting points. Valero is still working through contracts with Venezuela that might be around $40/bbl, nasty heavy stuff no one else wants or can handle, but with proper mixtures and tweaking turns into the same gasoline we all buy. The refineries' margins are being squeezed as their costs go up, but we'll never quite know except through careful analysis of 10Q's and other reports just what the weighted average costs are for that feedstock. It ain't all WTI and it ain't all sludge either.

I've heard that the instability (war, terrorism etc.) premium built into the oil price is 20%. Add in another 40% for the declining value of the dollar and the rest is due to supply and demand factors. Now if EVERYONE would just stop driving, the price would start coming down, but EVERYONE has different ideas on that. Personally I only drive about 5,000 miles per year, so it doesn't affect me that much. But I like walking, apparently others don't.

May, 15 2008

Len Gould says

Todd: I've seen decent guesses that trading / uncertainty is "likely" adding about $20/bbl to the price of crude, not terrible at these prices. Also, I've "sort of" figured out empirically that 1 litre of gasoline retails (in Canada) for about 1/100th the market price of a bbl of crude. $125 crude gets us $1.25 retail / litre. 3.8 litres / US gal., US retail prices about 3/4 of Canada due to taxes. Your mileage may vary.

May, 16 2008

Bohdan Buchjynsky says

Mr. Ferdinand E. Banks, your statement, "What you call projecting hegemony, Alan, goes by another name at Harvard and Stanford. That name is business.” seems to indicate a basic misunderstanding between the activities of "sovereign entities" and those of public or private corporations in business transactions. When a sovereign, such as Russia, utilizes entities it controls, such as Gazprom, to selectively apply gas pricing pressures in order to influence political outcomes in neighboring sovereign countries, such as Belarus, Ukraine or Georgia that is hegemony. The sovereign is using its sovereign capabilities inappropriately. One of the tenets of business and capitalism is competition, yet sovereigns by their nature eliminate competition. What competition does Gazprom have in Russia? What international entities are even allowed to compete with Gazprom in Russia? How could the corporations involved in the Sakhalin II LNG Project deal with or negotiate with Gazprom, when the sovereign through alleged environmental violations was offering either bankruptcy or demanding 50% ownership at no cost. When Gazpron got what it wanted the environmental violations evaporated like a mist. This is not business, it is extortion or hegemony. Maybe Harvard and Stanford need to review ethics, human rights and social responsibility as it applies to business transactions.

This is very similar to the “robber baron” period of “laissez-faire” capitalism of the 1800’s and early 1900’s in the US, where almost absolute power ruled almost absolutely. This resulted in a regulatory response in the 1900’s that applied limits to “laissez-faire” capitalism; however sovereigns, by their nature, set their own regulations and thus are not controlled like public or private corporations. To limit sovereigns we would need an international structure of enforceable business practices that apply to sovereigns that limit monopoly power, antitrust activities, collusion, require transparency and open competition, along with other reporting and disclosure requirements like Sarbanes-Oxley. You are correct in stating that, ". . . Mr. Putin didn't wait for the market to work its magic. . .", he relied on "command and control" to do what he thought was best for him, for his supporters and associates and for Russia, little else mattered or went into the analysis. With more sovereigns exercising control of the natural resources within their territories, this issue will become more of a problem in the future. Just like “nationalization”, without appropriate compensation, is inappropriate, so is the projection of a sovereign’s political and territorial imperatives through the use of sovereign controlled business transactions. If we are to call this “business”, then the US government must also participate in this type of “business” in order to protect our interests and those of our citizen’s. When foreign sovereigns nationalize assets of US based corporations without appropriate compensation, we should nationalize the sovereign’s assets and/or the assets of the sovereign’s nationals or corporations. When Venezuela nationalized Exxon/Mobil’s assets; we should have immediately nationalized all of Petroleos de Venezuela (PDVSA) assets in the US along with those of any other Venezuelan controlled or based entities. However, this is not the path to take and will only lead to the type of “gun boat diplomacy” of the late 1800’s and early 1900’s that sill haunts the US image internationally and in today’s world could easily lead to significant violence. What we should do is exercise international diplomatic, economic and regulatory pressures to discourage sovereigns from inappropriate business behavior. If the sovereign does not respond, then impose “sanctions” that have “teeth”, creating a situation in which appropriate behavior also provides a better economic result. One such response could be reciprocity of marklet access, you want to invest in my markets; then I get to invest in yours.

May, 16 2008

Alan Caruba says

Thank you all, once again, for a lively discussion based on my latest commentary. Let me suggest that when gasoline gets passed $4 a gallon and moves up toward $5, Americans will be storming the Capitol building wherein Congress resides and demanding that ANWR be opened to further extraction and, may I add, screaming to hell with the polar bears.

Perhaps nothing else will get their attention focused on this element of our energy needs. Presumably, when the brownouts begin rolling across America, they might even demand a whole bunch of nuclear plants and some of those "dirty" old coal ones as well.

May, 17 2008

Ferdinand E. Banks says

Thank you for your long comment Mr Buchjynsky. Strangely enough, I had a long talk with one of our graduate students yesterday whose position on the study of economic theory was similar to yours on economic history, by which I mean mostly wrong. When I say mostly wrong I mean wrong in both the big picture and the details. For example, what you should have done was to avoid using the word "competition", because if you had spent more time in the library you would have found out that competition has a number of meanings - some of which are similar to yours, and some of which are similar to those of what you call the "sovereign".

I'm speaking now of the real world, and not the world of some neurotic lecturer in a two-bit department of economics or for that matter your elite business school. And this thing about imposing sanctions if...." Come on now, this is Fred...Ferdinand E. Banks, you know, arguably the best economics teacher in the world.

I'll give you some advice. Keep reading economic history, which for an economist makes more sense than playing games with matrices, but while reading it think about it in terms of the world that we actually live in and will continue to live in for a while. And while you are at it get yourself a very elementary book on game theory, and IF it's the right book follow the advice I give my students: read it until you know it perfectly. By perfectly I mean until you realize how 'off-the-wall' your statement about the US nationalizing the assets of Venezuela sounds.

And yes, I'm glad to have heard from you.

Fred

May, 17 2008

Alan Caruba says

Score: Bohdan - 1 Ferdinant - 0

May, 17 2008

Len Gould says

Alan. When you support someone as winning a debate with points like "The sovereign is using its sovereign capabilities inappropriately.", I think the real score is the reverse of your proposed one. Since when did adjectives like "inappropriate" ever enter the decision scales in the politics of international petroleum, or make one flea's hair of difference?

May, 18 2008

Ferdinand E. Banks says

Alan

I'm still going to quote your article in a paper that I am reading in Paris, and in fact sent to Carly a few minutes ago. But for your information, I dont compete against amateurs - my business is trying to teach them how to think. Since that is the case I think the Score is Caruba 100, Bohdan 1, and 'Ferdinant' 0, because I probably didn't teach Bohdan anything, and you seem to be moving in reverse.

'The sovereign is using its sovereign capabilities inappropriately.' Thanks Len - I probably was laughing to much to spot that one.

Fred

May, 18 2008

Alan Caruba says

Apologies for misspelling your name. My bad.

The fact that you are going to quote my article in Paris gives me hope that my score may improve.

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