Friday, August 24, 2007

Speaking of Russia...

Here's a bit of historical irony on which to chew. It concerns the fall and rise of the Russian Empire.

As Yegor Gaidar has documented in this AEI publication - a solid conservative source - the fall of the Soviet Union was most likely precipitated above all not by dint of Ronald Reagan's sabre-rattling rhetoric or fear of "Star Wars" missile defense, but due to the decision of the Saudis in the mid-1980s to flood the world's oil market. He writes (and I quote at length):

The timeline of the collapse of the Soviet Union can be traced to September 13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices, and Saudi Arabia quickly regained its share in the world market. During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed by approximately the same amount in real terms.

As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive.

[The Soviet leadership was then faced with three options: start charging hard currency for oil exports, reduce food imports, or cut back military spending. None of them were seriously considered.]

Unable to realize any of the above solutions, the Soviet leadership...started to borrow money from abroad while its international credit rating was still strong. It borrowed heavily from 1985 to 1988, but in 1989 the Soviet economy stalled completely....The Soviet Union then received a final warning from the Deutsche Bank and from its international partners that the funds would never come from commercial sources. Instead, if the Soviet Union urgently needed the money, it would have to start negotiations directly with Western governments about so-called politically motivated credits.

....When the situation in the Soviet Union is examined from financial and hard currency perspectives, Gorbachev's policies at the time are much easier to comprehend (see figure 6). Government-to-government loans were bound to come with a number of rigid conditions. For instance, if the Soviet military crushed Solidarity Party demonstrations in Warsaw, the Soviet Union would not have received the desperately needed $100 billion from the West.

The only option left for the Soviet elites was to begin immediate negotiations about the conditions of surrender. Gorbachev did not have to inform President George H. W. Bush at the Malta Summit in 1989 that the threat of force to support the communist regimes in Eastern Europe would not be employed. This was already evident at the time. Six weeks after the talks, no communist regime in Eastern Europe remained.


Gaidar also indicates why the Saudis opened the oil spigots: "In 1974, Saudi Arabia decided to impose an embargo on oil supplies to the United States. But in 1979 the Saudis became interested in American protection because they understood that the Soviet invasion of Afghanistan was a first step toward--or at least an attempt to gain--control over the Middle Eastern oil fields." The Saudi decision to depress the price of oil - and hence undermine the Soviet economy - was the protection money that was paid to the U.S. government in return for its military umbrella. And, it also nicely floated a post-oil peak U.S. economy, a scenario that couldn't have been pursued when the U.S. was a net oil exporter (until 1971). It was morning in America.

Here's the irony: with the current high price of oil, the Russians are now reacquiring their lofty economic and, it would increasingly appear, military position. Still possessing some of the world's large remaining energy reserves, Russia has been throwing around its economic weight (as in the case of the Ukraine last winter) and increasingly flexing its military muscles. As recently as a few weeks ago a Russian submarine planted a flag on the floor of the North Pole region - an area that lies in international waters - declaring what may be vast reserves of sub-polar oil and gas to be Russia's to extract (more irony: this area has always been inaccessible until the advent of global warming, made possible by the burning of - fossil fuels!). This move has prompted Canada to announce plans to build several military bases in the area. The race for the table scraps continues to unfold.

The reason for these high prices, according to some knowledgeable observers, is that the world's largest mature oil fields - including the Ghawar oil field in the Saudi Arabia - are all showing signs of exhaustion. According to Stuart Staniford at theoildrum.com, there is compelling evidence suggesting that Saudi oil production is entering a period of permanent decline. As Matthew Simmons - a member of Vice President Cheney's 2001 Energy Task Force - has put it, "if it turns out that Saudi Arabia is has peaked, then categorically the world has peaked" (he makes this statement in the important documentary, "The End of Suburbia," a must-see film). Declining Saudi oil production is directly benefiting the Soviet Union at a time when - ironically enough - the U.S. is in a poor position to confront its erstwhile enemy. If Staniford and others are right, there is no Saudi card to pull out of the deck now. Our prompting of Saudi Arabia to flood the world's oil markets in the 1980s accelerated the date of worldwide peak oil by several years - particularly if you consider the extent to which that glut has financed the construction of "exurbia" in America, the most energy intensive living arrangement ever conceived. Ironically, the oil glut of the 1980s and its after-effects (decades of oil gluttony) effectively ensured that we'd have a resurgent Russia in the 2000's. It also necessitated a deepening of our embroilment in the Middle East, the only major and reliable supplier of our petroleum drug, and where we have in recent years fought two wars. An important question should be asked whether these consequences were considered at the time, or whether it was believed that plentiful petroleum resources would remain forever available. In either event, one can't help but suspect that the greatest triumph of Reagan's presidency was purchased at a higher price than we realized at the time. While few will realize this, we may have Reagan's oil tactic to blame for a resurgent Russia. While I am not suggesting that we were wrong to attempt to bring down the Soviet Union - an evil regime if one ever existed - we should reflect a bit more forthrightly on the true costs of that triumph, and realize its connections to our current predicament.

Nevertheless, there is a way to put the practical effects of Reagan's strategy back into effect, if by a different means. Were a visionary President (i.e., candidate, not the current office-holder) to call for America to cut back its consumption of fossil fuels in every possible way - to frame it as a call for patriotic self-sacrifice and republican independence - an American boycott of oil would have the effect of driving down prices and taking some of the steam out of the Russian juggernaut. We would have to be disciplined in order not to fall back on old habits when oil prices fell again - most likely putting a definite floor on the price of oil imports in the form of a carbon tax, a floor that would accelerate the development of conservation and sustainable energy forms. A crash in oil prices would also have the beneficial effect of starving the Middle East dictators and removing our need to prop up corrupt regimes. It would allow us to extract ourselves considerably from the fortunes - or misfortunes - of that benighted region and thus perhaps remove some of the animus against us on the "Arab Street" (wishful thinking, perhaps, but this is probably the only plausible strategy for combatting Islamic extremism). The beneficial effects of such an effort are more numerous than can be counted; the major challenge is that we will have to change how we live, a dim prospect at best. However, such an outcome would, in fact, prove to be the greatest benefit of all in the end.

In short, kicking the oil habit is the moral equivalent of war. Are there any who will take up the standard? I'm not holding my breath.

3 comments:

Anonymous said...

Don't know about these oil theories you're spinnin' hard, Patrick, but I will try to check out that End of Surburbia movie. Do you have a key essay or two that show the evidence for your oil views? As for Russia, the alternative to its resurgence was outright collapse/disintegration. And it remains standing on legs of very shaky strength. See Allen Lynch's How Russia Is Not Ruled to see just how bad things were in the 90s. Whatever one makes of the Putin regime, one does know that nuclear weapons are more important than oil at the end of the day.

Patrick Deneen said...

Carl -
Well, there are a few links in the post itself that you might want to check. Gaidar's argument has been widely discussed elsewhere, and often admirably, by many conservatives. If memory serves, Joe Knippenberg (or someone on "No Left Turns") once had a post related to it, but they don't have a search mode, and I don't have the patience to locate it. Maybe Joe remembers.

Yea, nukes are pretty important (the most recent "Atlantic Monthly" has some pretty scary graphics on the radiation trails of a 550 megaton explosion in NYC and DC - really comforting for me, I'll tell ya. I've got the gas cans filled and ready to go in the shed), but it's also the case that there's still a far higher likelihood of a nuclear explosion in the U.S. coming from a non-state (terrorist) actor than from the Russians (we know where they live). So, if you're worried about nukes, I'd let that keep me up at night rather than whatever Putin is sitting on.

Whereas, if less immediately devastating, the prospect of a Russian-Iranian oil cartel (currently being discussed) IS something that is being actively discussed, and Russia seems far more likely to want to engage in energy strong-arming than nuclear strong-arming these days. Very effective, and you can still make money from your victims. As I note in my previous post, there is the possibility that we may begin importing natural gas from Russia. Not a nuclear bomb, but a potential weapon nonetheless.

As for other works you can look at generally about our oil predicament, a good place to start is Kenneth Deffeyes' books "The View From Hubbert's Peak" and "The End of Oil" (both Princeton University Press). Deffeyes is Professor Emeritus of Geology at Princeton University, and incidentally appears in the film "The End of Suburbia." He's not as apocalyptic as Kunstler (in "The Long Emergency"), but still knows we're in a pickle. Michael Klare's "Blood and Oil" is also good, as mentioned in a previous post ("Tough Oil").

On the Saudi oil production trajectory (the several trillion dollar question), you can check the above link to oildrum.com, or look at Matthew Simmons' book "Twilight in the Desert." He's an oil man, and clearly knows his stuff.

Anonymous said...

Thanks Patrick for the refs. Yes, my Russian nuke worries only really kick in with the collapse of Russia into anarchy, something that I think could have occurred had not Putin and Russia's oil-boom occurred.