soviet union oil production

[7] In recent years, Putin has put forward diction on the dependability of Russian natural gas. The figure of marginal cost is almost always unknown. The resource curse theory maintains that rent seeking (or, to be exact, the fight for rent) is one of the main roots of oil extracting countries’ problems that diverts resources from production activities.110, But who received the rent from exporting hydrocarbons to socialist nations? In 1979, the Islamic Revolution in Iran caused a severe cut in oil production there. The Dawn of the ‘Discovery of the century’, The Tyumen Pravda, 1973, no. According to it, Western Siberian deposits were supposed to be actively explored in the short term. The best years of the Russian oil industry, when it was a vibrant element of the world market, were over. 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 … According to the authors, crude oil production costs (transportation included) in the mid-1980s amounted to a little over $40 per ton (or $5.33 per barrel),74 with the world oil price of $240 per ton (as opposed to Gaddy and Ickes, they take the actual crude oil and gas production costs, including the normal level of profitability on the invested capital instead of the so-called natural costs).75 This was yielding rent of $150–$200 from each ton. [7] This political decision was not accepted easily. 63 Pravda, January 27, 1978 (as cited by Goldman, 42). They were not linked to the shortages of oil and gas, but rather had to do with rapidly increasing costs (of exploring, extracting, and transporting materials), huge inefficiency, repeated shocks, and other unpleasant surprises. 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. 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. The U.S.S.R.'s oil industry remains in disarray. The reaction of the Soviet Union and developed nations to the energy shocks of the 1970s is indicative. 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. However, it is the political-economic mechanisms that have been attracting the lion’s share of researchers’ attention over the last two decades. 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. Between 1970 and 1986, the growth rates of capital investment in the oil and gas industries were considerably higher (three- to five-fold) than in the industry and the economy on average. There is a temptation to compare the economic crises caused by drops in oil prices in the late Soviet Union and modern Russia, and to try to draw lessons from the Soviet crisis in order to exit the current one. 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. of the 1920s. [3] This difficulty came from the supply-side. This made both the Soviet Union and Russia extremely dependent on energy markets they could barely influence. If cross-border capital flows are nonexistent or very small, their volatility should pose no threat to the economy (as there is no stock market and the pressure on the national currency’s exchange rate is tiny in both directions). then we started to come to the conclusion that this wealth had at the same time seriously undermined our economy; the due and overdue reforms were continuously postponed.”114, In turn, historian Steven Kotkin writes that oil money made it possible to boost salaries and expand perks and privileges of the constantly increasing number of Soviet elite. The turnover tax composed the principal part of this difference. Back in 1960, just twenty-five years earlier, the Soviet Union’s GDP per capita was on par with Japan’s. 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). [5] Furthermore, the USSR struggled to transport its Eastern resources to its Western side for later consumption and exportation. There are no “ifs” in history. 93 Russian foreign trade. 8 (2005): 559-583, 569. However, beginning in the 1870s, the Russian government terminated the monopoly and opened Baku for competing private companies. It is important to keep in mind that the military-industrial complex was drawing in the best resources, including the most skilled staff and material resources. Crude oil output in Russia amounted to 600,000 barrels in 1874 and reached 10.8 million barrels within a decade, which equaled to about a third of the USA’s output. Gustafson uses a metaphor to compare the Soviet economy with a warped tree that has grown under the strong northerly wind of industrialization. Agriculture wouldn’t be able to boost the harvest output due to chronic problems that had accumulated over decades. . Perhaps, the main factor is that the authorities in the 1970s didn’t understand the nature of the situation they faced. Unfortunately, there are several technical difficulties that considerably reduce the accuracy of calculating the total oil and gas rent both in Soviet and post-Soviet Russia. The time of hand-dug wells had ended. Waiting for airplane urgently. These are situated in the 7 main basins: Volga-Ural, W. Siberia, middle Caspian, S. Caspian, Karakum, Dnieper-Donets, and Timano-Pechorsky. It’s commonly believed that in a planned economy, enterprises don’t have sufficient incentives to cut costs, but still, as confirmed by the argument above, these incentives can change and are influenced by the flow of incoming resources. 52 N. Karyagin, O. Mezhslumov, Y. Shayevskiy, V. Timonin, “Problems of Siberian Oil,” Pravda, 1965, no. According to Daniil Yergin, “this resulted in a blast of entrepreneurial activity. It’s unclear why a resource boom should aggravate the quality of policies. On the whole, we can see that gas rent was a much more stable part of the total rent than oil rent. 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. . [6] In the late-1970s, both coal and oil production began to stagnate. However, even Gosplan had to react to the demands of consumers and the leaders of the country in one way or another and change the flows of investment. For instance, the Soviet Union provided huge subsidies to both domestic and foreign (Comecon nations) energy consumers. 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. The income effect for the USSR as a large oil exporter was positive, that is, it increased the domestic demand for oil (of course, a separate study is needed in order to understand how the growth of oil revenues in the 1970s led to the growth of military expenses, vehicles-to-population and vehicles-to-industries ratios, and so on, and how it affected the demand for oil). Data by the Customs Revenues Department for various years (as cited by Goldman, 5-6). For an extended period of time, the Soviet Union was the world’s largest producer of energy resources. The energy component of most products’ prime costs was reduced to 5-7 percent, which greatly decreased the incentives to save energy resources. This means that the negative consequences of high resource availability take place only under certain conditions (while the composition and threshold values of these factors are subject to debate; this is largely explained by the difficulty of evaluating the influence of different conditions on the dependence of economic growth from resource abundance empirically). The size of the share of each category of participants has important political-economic consequences. His successor, Feliks Arzhanov, was fired in 1980 for attempting to maintain the 1985 production plan at the level of 340 million tons (in 1980, a total of 312.7 million tons were extracted in the whole of Western Siberia), while Gennady Bogomyakov, then first secretary of the Tyumen Regional Committee, demanded that production be increased to 365 million tons.60 In the early 1980s, hundreds of men at the wheel of the Western Siberian oil industry, including two future heads of the Central Committee, were fired for failing to meet the overstated plans.61, It could be that the planned economic system, or, to be exact, the system of incentives it created, was largely to blame for the impossibility of a rapid increase in output. 26 June, 1987. If it’s true, we can hardly say that the fight for this rent inside of the Soviet Union’s allied nations had diverted significant resources from production activities. But what does it have to do with the drop of oil prices in the 1980s? For the Soviet Union, the stagnation in agriculture was perhaps even more influential (see data on grain imports later on). [6] Policies that led to the large-scale implementation of techniques such a water-flooding reservoirs had initial benefits and were administratively efficient. As for oil production in the Baku area, it failed to reach the pre-war (1940) level even in 1966, the post-war peak. There are alternative Western estimates of the correlation between GNP growth and energy consumption in the USSR between 1960 and 1980 (see table 4). 15 Calculated on the basis of: Global, British Petroleum, “Statistical Review of World Energy 2006,” http://www.bp.com/content/dam/bp-country/en_ru/documents/publications_PDF_eng/Statistical_review_2007.pdf (2007). Prior to the mid-1950s, Soviet oil was consumed inside of the Soviet bloc. It can be noted that despite the sharp increase of prices of oil, its share sold to developed nations plunged, while the share of gas, on the contrary, rose. 91 (as cited by Slavkina, 269). This issue was also pointed out in studies that attempted to determine adequate metrics of measuring a country’s resource richness. 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. But a counterargument can be cited that back in 1960, the Soviet Union’s GDP per capita was almost equal to that of Japan (see figure 3), although the Japanese economy kept growing for thirty more years while the Soviet one started to slow down in the 1970s. This drop in oil price made it become much less profitable to drill new oil wells. 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. [9] About 80% of the natural gas that Russia exports to Western Europe goes through Ukraine territory. This is why plans based on misinformation are hard to implement. If the output of low-cost deposits is stable and has a large share in the country’s total output, then the rise of marginal costs of the new deposits doesn’t have a remarkable effect on average production costs (that is, figures of marginal and average costs don’t go separate ways during the increase of production). Economic mechanisms may seem reliable, but a question arises: why can’t the government develop and apply the necessary corrective steps? This disease emerges and progresses through the real exchange rate of a national currency and, in particular, through its strengthening.11 There are two ways that this could happen: through the increase of the national currency’s nominal exchange rate or through a higher rate of inflation in the country compared to that in other countries (its trading partners). According to this thesis, the terms of trade of resource-exporting nations get worse over time. The income effect acts in the opposite direction; demand for such goods drops sharply with the increase of income (that is, these are inferior goods) and falls to the level that it exceeds the increase of demand due to the substitution effect. Similar models (of overlapping generations) assume that the current generation has no intention to leave an inheritance and gets credits at the expense of resource revenues for future generations. 3 Translator's note: all tons (of oil, etc.) In the beginning of the 1980s, experts in the energy sector realized that “the abundance of cheap energy resources led to a notable weakening of the energy saving trend already taking place in the 1970s. From the early-1960s to the mid-1970s energy production, consumption, and net exports increased for the Soviet Union. 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. In most cases, it’s the government that withdraws the principal part of this rent. The first factor was supposed to create incentives to boost the efficiency of extraction and transportation of oil, which is what one can expect from a market economy. по: Soviet Legacy on Russian Petroleum Industry. A consequence of the dissemination of this theory (first and foremost in Latin American nations) was large-scale import substitution industrialization. (Under Putin it has returned to 10-million barrels.) First, oil and gas rent was fluctuating heavily. In the case of oil and gas, resource rent is excess income on top of normal income received from investments with normal profitability. Thus, potential rent exaggerates the total amount of rent. 57 Maltsev, Igrevskiy, Vadetskiy, 148 (as cited by Shafranik and Kryukov, 150). It was unable to react by devaluing the currency, and even if it did, it would not make much sense as civic industry had continuously experienced a deficit of resources (as most high-quality resources were directed to the military-industrial complex output) and wouldn’t be able to boost output. Thus, it’s quite likely that the relatively low (by world standards) efficiency of the Soviet oil and gas sector did not allow the economy to become even more dependent on oil and gas. However, the volume of oil production was very modest. . After 1965, eleven of the biggest deposits were discovered, five of which had over 1 billion tons of initial in-place resources (Samotlor had 6,684 million tons; Fyodorovskoye had 1,822 million tons; Mamontovkoye had 1,349 million tons; Lyantorskoye had 1,954 million tons; and Priobskoye had 1,987 million tons).58. 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). Maybe this luck, and the huge geological exploration efforts, did more harm to the Soviet Union (and Russia in the 2000s). But by the 1960s this method had become less efficient. Furthermore, incredibly, oil production in the Soviet Union declined before consumption, which makes a cause and effect scenario of an economic crisis causing an oil production decline impossible. However, we should make two notes that make the calculated data different from reality. This largely explains the immense pressure the oil industry experienced during the 1970s in Western Siberia, with the aim to sharply increase the output to make up for the decline in the Volga-Urals region. In the beginning of the 1880s, about 200 oil refineries were active in Baku’s new industrial suburb with a suitable name, the Black City.”30, At the turn of the twentieth century, the area around Baku was the world’s biggest oil-producing region. Higher volumes of oil and gas income would have made it possible to conduct even more massive procurements of food (and increase subsidies to the stagnating agriculture sector), consumer goods, and investment goods. This means that if the USSR came close to the the United States’ level of oil consumption while maintaining the same energy efficiency, it would have turned from being an oil exporter into an oil importer. This happened, among other things, at the expense of the shift of primary energy consumption from coal to oil and gas (the share of coal was reduced from 52 percent to 24 percent86). . also facilitated the drop in interest in energy preservation during operations.”89, However, what was even worse, energy efficient measures started to be considered economically inefficient when planning new equipment, objects, and enterprises in many sectors of the economy and in prospective developments on the whole. The actual Soviet oil output amounted to three quarters of the total Middle East production.”35. V. Staroselskiy, Yesterday, Today and Tomorrow of Russian Oil and Gas Industry (Moscow: IGiRGI, 1995), 85 (as cited by Slavina, 267). Can we imagine that the Soviet Union could have converted a part of the military-industrial complex into manufacturing civilian products more successfully and thus smooth the drop in oil prices? USSR Oil Production is at a current level of 612.71M, down from 616.34M one year ago. 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. The end of rigid limiting . The above-mentioned publication, The USSR Energy Complex, notes that “between 1960-1980 . If, in addition to the above, the USSR sharply reduced procurements of these products (which would be natural in these circumstances), it would have two choices: to create the necessary production inside the country (subsidized at the expense of resource rent) or to increase procurements in developed nations (at the expense of oil and gas deliveries). [2] During the late-1950s, mining activity shifted from European Russia to Eastern Russia for more mineable resources. By 1939, they dropped to 0.4 million tons. Secondly, the Soviet economy, even during periods of the highest oil and gas prices, was dependent on oil and gas much less than modern Russia. In this publication, we will focus on the formation and development of the Soviet economy’s oil and gas dependence. Active export of oil and gas to distant foreign nations was also not planned. 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). After this, exports rapidly grew: up to 57 million tons in 1964, 111 million tons in 1970, 183 million tons in 1980, and 216 million tons in 1989. What is just as important, it led to extremely high volatility of output (and, therefore, of oil exports and revenues), which is considered one of the main manifestations of the resource curse (only under certain conditions, linked to the fact that the country doesn’t have good instruments to overcome the volatility of revenues, such as a stabilization fund or a developed financial market). This thesis is backed up by theoretical studies. A published CIA study, "Soviet Oil played an under-appreciated role in the fall of the Soviet Union. 116 Global, British Petroleum, “Statistical Review of World Energy 2006 (2007). In Washington, they called it a ‘Soviet economic offensive.’”95 Between 1960 and 1980, net energy exports grew almost 10 percent per year (compared to the 4.4-percent growth of domestic energy consumption).96. mentioned in this paper are metric tons. 49 Global, British Petroleum, “Statistical Review of World Energy 2006 (2007). The United States is a good example. Daniil Yergin noted that “only a decade had passed since the time when Stalin was gloomily reflecting on the weakness and incapacity of the Soviet oil industry. Although the Soviet Union was a big exporter of all energy resources before the 1970s, it supplied only a fraction of their total output volume to foreign markets. First, the revenue from selling a resource must be considered potential revenue that could have been received from selling the resource at a market price, rather than as actual revenue received from the sale. How would it affect the national leaders’ decision to conduct the Kosygin reforms that aimed to raise the workers’ material interests in the results of their labor? Each of these basins is discussed. During World War I and the Civil War, oil production in Russia suffered a lot but then started to recover. 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. For example, in the early 1960s, the deputy head of Gosplan responded to the offer from senior Tyumen officials to establish annual production of 10–15 million tons of oil without even checking the geological maps in front of him, saying that “the huge oil and gas deposits frequently mentioned by the Tyumen people are nothing more than a creation of a provincial and sick imagination. If this idea had been implemented, a large part of the oil and gas rich territory would have been flooded and apparently made impossible to use by the industrial oil and gas production at the existing level of technology. Tyumen. Considering the huge size of gas rent and its relative instability, this poses the question: if Russia suffers from oil and gas dependence, which factor is the main one behind this dependence—oil or gas? There is evidence that the Soviet Union’s industrialization became a role model for it. . The most important factor is that the institutions established in the Soviet planned system turned out to be extremely poor at preparing for adapting to the chaos of the world markets, which the state couldn’t control. Thus, the share of indirect taxes or turnover tax (which helped extract the rent) in these products’ retail prices amounted to about 80 percent.66, Describing the methodology of calculating the resource rent, Gaddy and Ickes point out that “both the revenues and the costs of production must be considered in relation to the most profitable alternative use of resources. Production Soviet Union vs European Axis. 62 Izvestiya, October 15, 1984 (as cited by Goldman, 42). Transportation of gas demands huge capital expenditure on constructing gas pipelines and compressor stations, but the marginal cost of its extraction and transportation are relatively low. This would result in larger economic growth rates during the downturn (in 1986 and the following years). But what if the principal volume of resource rent comes from the internal consumption of resources, rather than from their exports? 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. This feature of the Soviet (and now the Russian) economy has determined, among other things, its high oil and gas dependence in a sense that large amounts of oil and gas were required to keep the economy running. But it’s also possible that it would have pushed the nation toward market reforms earlier, making them less revolutionary. In the mid-1980s, the ratio between the average wholesale price on crude oil and the retail price of 93-octane petrol was about 1:17. All the economic mechanisms of the resource curse we review presume the existence, in one form or another, of market mechanisms (that is, the existence of private economic agents who react to incentives). 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. It is difficult to estimate this now. Statist explanations are suitable for explaining why decisionmakers at every level of managing the Soviet economy lacked motivation to raise the energy efficiency of both production and consumption. An in-depth study of economic growth of thirty-five nations between 1870 and 1939, conducted by Christopher Blattman, Jason Hwang, and Jeffrey Williamson, concluded that nations specializing in the production of raw materials (with highly elastic prices) have a higher elasticity of the terms of trade, a smaller amount of foreign direct investment (FDI), and slower rates of economic growth. According to the authors, the omitted amount is an integral part of the rent, and its existence itself reflects decisions regarding the use of wealth. Lvov and Pugachev,77 using the input-output data of Russia for 1991 at world prices, tried to estimate the volume of indirect subsidizing of the economy with the help of oil and gas rent. 59 Mariya Slavkina, Triumph and Tragedy. 1960, after over five years of the Soviet economy existed under a controlled... This logic 1970s didn ’ t have a choice 164.9 thousand tons in 1985 two effects—the effect. 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