Back in the 1960s and 1970s, the country that was the “big growth story” was the Soviet Union. Its oil consumption grew by leaps and bounds. Its space program grew; its military program grew; and it became much more industrialized. But then something happened to stop the amazing growth story. The Soviet Union became the Former Soviet Union (FSU) in late 1991, and even before that, oil production and consumption slowed.
It seems to me that the FSU changes have been helpful to the rest of the world, in ways we don’t stop to consider, because it helped put off peak oil and left resources of many types in the ground that could be extracted later. Furthermore, the fact that in many ways the FSU has not bounced back to where it was prior to the fall, even today, has some profound implications, as the world contemplates going through its own financial “tight spot,” and wonders what may be ahead.
It is not the purpose of this article to analyze precisely what happened preceding the collapse, but looking at some graphs of FSU data, at least part of the problem seems to be financial. There was a drop in the price of oil, starting about 1981 (Figure 1).
This drop in oil price made it become much less profitable to drill new oil wells. Also, the Soviet Union was an oil exporter, and at a lower price, it earned less profit for the oil it exported. Given these headwinds, oil production stopped rising, and by 1988, began to fall. Oil production did not start rising again until the early 2000s, when oil prices began rising again and a different political system was in power.
As oil production dropped in the 1988-1991 period, FSU oil exports plummeted (Figure 2 – Difference between production and consumption). Given the combination of a low quantity of oil exported, and low sales price of oil exports, the FSU found itself in financial difficulty–it could not afford to pay for food imports, which it badly needed, and the country collapsed.
I’m sure this is only part of the story–but the question that comes to mind is, “How different would history be if, somehow, the Soviet Union had somehow held things together–perhaps with other sources of income, or an International Monetary Fund loan–so that its oil consumption behaved more like that of the rest of the world?” No doubt part of the reason that world oil prices remained low in the 1985 to 2000 period was the low oil consumption of the FSU.
A Possible Different Shape of World Oil Supply
If the Soviet Union had not collapsed, one of the things that likely would have happened is that world oil prices would have headed higher, sooner, because Soviet demand for oil would have helped hold world oil prices up. It is not clear which oil might have been pumped out sooner, but it seems likely that if there was slack in the system, say in the Middle East or in Russia, oil would have been pumped out sooner if oil prices had been higher, as the result of increased demand from the FSU.
Figure 3 shows an estimate of what world oil production might have looked like, if FSU’s oil consumption, instead of dropping and remaining low for many years, had followed more of a “normal” pattern (after a plateau in the 1980-1985 period, oil consumption had risen at the same rate as world consumption rose, instead of entering into a plateau followed by collapse). This could only have happened, of course, if oil producers could really have extracted enough oil to meet this higher demand.
World oil production has been on a rough plateau since about 2005. If the FSU had not experienced a drop in consumption, it seems as though we might have hit this plateau earlier. Comparing my adjusted forecast with what actually happened, liquids consumption in the higher scenario would have reached 84.9 million barrels a day in 2000, rather than hitting a similar amount in 2006. If maximum production is reached based on the “size of the tap,” perhaps we would have begun the plateau several years earlier, and now be closer to (or past) and the expected downturn in total world oil supply.
Impacts Relating to Other Fuels
Other fuels seem to have also been affected by the FSU collapse (Figure 4). Neither coal nor natural gas has yet hit the level of consumption in 1991. This lower internal consumption of natural gas and coal left more fossil fuels in the ground, helping world CO2 emissions, and enabling more FSU exports later, without the need to add as much more new productive capacity, and new pipelines, as would otherwise be the case.
Russia (with the assistance of other FSU countries) is now a major exporter of natural gas to Europe. Russia is also an exporter of coal, with exports almost tripling since 2000, and with a new contract signed to sell more coal to China.
One of the things that has enabled these exports is the fact that electricity production / consumption of the Former Soviet Union is lower now than it was in 1991 (Figure 5). If the FSU’s own use of electricity were growing rapidly, it would have needed more of its own natural gas and/or coal for electricity production.
Since 1994, the United States has purchased recycled Russian bomb material through the Megatons to Megawatts program. If Russia had not experienced a big drop in electrical consumption in the 1991 to 1994 period (and the financial problems of the country), a person wonders whether this bomb material would have become available. If nothing else, the FSU could have used it to fuel more electrical production for its own use. The world could no doubt have mined and enriched more uranium, but uranium prices would have needed to have been higher. If uranium limits are indeed an issue, we would be farther on our way to reaching “peak uranium.”
Thoughts for Tomorrow
We assume that the future will be much like today, but the FSU example shows that this is not necessarily the case. The Soviet Union experience shows how dramatically things can change in a few years, and how slowly things may bounce back. Fuel consumption and electricity consumption are still, even today, very low. A person would think that capitalism would have better results than communism, but in many respects, the graphs do not seem to show this to be the case–in many respects, the post 1991 experience is worse than the pre-1985 experience. While there is considerable oil is extracted in Russia and other FSU countries in later years, the people of FSU have not been able to consume much in it, and other measures of economic progress, such as electricity consumption, remain low.
The United States and a number of European countries are now going through financial tight spots, in some ways not all that different from the financial tight spot the FSU found itself in, in the years leading up to 1991. We don’t know what fallout is ahead, but the experience of the FSU shows that the results can be huge and long-lasting. The FSU was only a small part of a world economy, and the rest of the world was doing fairly well. This combination of circumstances enabled some recovery on the FSU’s part. Today, a much larger share of the world’s economy is facing a financial tight spot, so the potential for a long-lasting bad result would seem to be even greater.