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.
Background
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).
Figure 1 - Former Soviet Union oil production and price of oil, in $2010, based on BP data.
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.
Figure 2. Former Soviet Union Oil Production and Consumption, based on BP Statistical Data.
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.
- Figure 3 – Estimated world oil consumption, of Soviet Union consumption had risen at the same rate as the rest of the world’s post-1985, and the world was really able to supply this extra oil.
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
Figure 4 - FSU Consumption of Fuels other than Oil, Based on BP Statistical Data.
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.
Figure 5. Former Soviet Union Electricity Consumption, based on EIA data.
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.
I wrote to Dmitry Orlov, and asked for hist insights. This is what he had to say:
“There are actually two Russias: Moscow and St. Petersburg and a few other cities, and the rest. Moscow and St. P. are more like Paris or Tokyo except even more expensive. People there are crazy about SUVs and big box stores and latest electronic gadgets. The rest of the country is dying, depopulating: a sick, alcoholic, drug-addicted population that nobody cares about as long as they stay out there somewhere. There are entire large cities that are just slowly rotting away, without jobs, with minimal health care, no drug law enforcement. Overall, Russia’s population has been dropping, due to low life expectancy and emigration. So, I think it’s a mistake to look at Russia’s energy consumption, or standard of living, in the aggregate, and ignore the fact that it’s “a country within a country.” Also, much of the energy and raw materials consumed by the Soviet system were just pure waste. Both military and civilian sectors produced a fantastic number of failed or useless things and projects. After the USSR collapsed the landscape was dotted with flooded foundation pits. This production capacity was allowed to rust away. Perhaps its last gasp was concrete exports to China; once that was over, entire towns centered around cement works had to pretty much be dismantled. The younger people left, the older people stayed behind to tend their kitchen gardens and die.”
in conclusion i would say that it’s not clear to me what you were trying to argue in the first place. the events after the soviet union collapsed and the current situation in europe are in so many (interesting) ways so different…
I think in both situations we are dealing with financial situations that look ready to come apart because outgo is/was greatly in excess of income. In Europe and the US, the financial situations have to do with economies not being able to withstand high oil prices and still maintain economic growth. Without sufficient economic growth, there are huge debt defaults, and many people unemployed. The governments step in and try to fix things, and then they are the ones with financial problems. So in both cases, the problems were oil related.
Everyone assumes our current financial situation is fixable, but it is difficult to see how.
Europe is dealing a severe decline in oil production from the North Sea.
And as Gail mentioned, high energy prices will cause economic contractions.
There are commonalities between what the USSR went through and what Europe and the USA are dealing with.
And still with every speech Obama tells us we need to return to an era of sustained growth. This is impossible without a dramatic, fantastical increase in our energy supply right now….
What Gail has written on Russia is much the same as what Dmitri Orlov says about the state of the USSR and it’s breakup and de-evolution.
I’ve heard similar stories about people giving up and drinking themselves to death from other sources. Read up on Krokodil for some real life horror stories.
Dmitri blogs at:
http://cluborlov.blogspot.com/
Just a guess, but one reason why the FSU may be using less energy might be because, since the breakup, many inefficient plants have closed because of competition from more efficient foreign producers. Imported goods might be produced mostly with energy from outside the FSU. And a lot of their vast military production was reduced, although I suspect that it is now gradually increasing for the export market.
I think that’s a big part of it.
In the USA, back in 1999, I was coming across circumstantial evidence that Mathew Simmons was advising much of the USA’s chemical industry to move to Asia because of an imminent natural gas shortage. DOW Chemical and DuPont moved almost all of hteir chemical operations overseas within a few years.
If we look at natural gas production in the USA, we see that it’s been relatively flat since 1970. Yet the industry is in a frenzy, sinking new wells at a record breaking pace. I think that Mathew Simmons was right, and had those factories stayed int he USA, they would’ve driven the price of NGas very high, and we would’ve had constant shortages. The situation in California with the shortage and Enron playing the opportunist, was a wake up call, but folks read it wrong in my view. We have the perception that natural gas is plentiful and cheap, because we keep losing jobs. If we turned the employment situation around, natural gas prices would spike and kill the recovery.
I think that this situation work in a similar fashion with energy sources such as oil and coal. So your argument about why Russia is seeing flat petrol consumption, fits the data we have.
gail, i think you miss some points here:
“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.”
you forget that soviet union wasted lot of energy. lots of factories were old (and polluting) and since the energy prices were very low there was no need to save the energy. the central heating in apartments could not be adjusted, so that it was quite possible that people had to keep windows open even if it was very cold (say -30 celsius). when soviet union collapsed this had to stop, and many factories were simply closed which of course reduced the energy consumption. and many more factories had to be built from the scratch to replace the old ones, and obviously the new ones were much more energy efficient. for example near finnish border (i’m from finland) at the end of soviet union there were still paper factories in operation which were constructed in 30’s. now all these are replaced by new ones. i don’t know exact numbers but it seems to me that to keep the energy consumption going (get “better results” in your words) they would have to continue to waste energy as before.
hence i’m not at all sure that you can infer that situation is now worse than during soviet time. also i think you haven’t visited russia recently (or during the soviet times?): “Things are so bad, outside a few big cities, that people are more or less giving up.” i think this statement is too vague to be useful. russia is a big country.
finally it would be interesting to know what is the part of russia in fsu?
I am sure that what you are saying is at least partly right. I have heard some of those stories myself.
But why is oil consumption still so low? In most parts of the world, if people are making decent salaries, they buy cars, and use gasoline or diesel to fuel them. Here we see oil usage essentially flat for years. What does this mean? Are rich people in the Soviet Union very different from the rest of the world and because of this not buying cars, or is it really that there are very few rich enough to own cars? Or is there long-term fuel switching from oil to something else in electrical generation? I would find long-term electrical switching hard to believe–we pretty much got off oil for electrical generation in the early 1980s–that was a major reason for the dip in consumption and prices.
“Are rich people in the Soviet Union” i guess you mean russia?
the car ownership is not yet what it is in the west but it is growing fast:
http://blogs.ft.com/beyond-brics/2011/07/05/russias-car-market-back-on-track/#axzz1UdLyt1m9
“But why is oil consumption still so low? ” i think you will appreciate this report:
http://www.ifc.org/ifcext/rsefp.nsf/AttachmentsByTitle/FINAL_EE_report_Engl.pdf/$FILE/Final_EE_report_engl.pdf
from p. 28: “Russia’s energy intensity has decreased by roughly 3.4 percent annually”. soviet union wasted so much that by doing things reasonably the energy consumption does not grow although economy grows (of course this can only continue for a certain time)
from p. 20: “domestic demand for petroleum products continues to
increase at a robust rate.” perhaps in some fsu countries oil consumption actually decreases (as you know some of them are really in a bad situation) so your fsu curve is flat…
so i think it is probably not very illuminating to draw curves of fsu and then draw conclusions about russia.
@Gail
Do you know the figures for Soviet Union Debt to GDP and Debt Service ratio and the corresponding numbers today ? I am wondering if there is a correlation between that and energy prices across continents and countries ?
I am afraid I don’t have information on debt service amounts. Maybe someone else has information.
I think a big piece of the Soviet Union’s problem was lack of cash from exports, and the time there were crop failures. Without cash from exports, and without better prospects for cash from exports, even a small amount of debt was hard to service, and it would be hard to convince others that they could afford more loans.
Dmitri Orlov is a great resource in understanding what the USSR went through and the effects of Perestroika. As an American, I thought I paid more attention than most, to what little news we got on what was happening there. I had suspicions that the US situation could be compared to the USSR’s. Orlov has done a great job in contrasting the two and filled in a lot of missing information on the topic for me.
You mention IMF loans. This is actually one of the things that came through and worsened Perestroika. Economist Jeffrey Sachs and Harvard arranged a good deal of the structure of the IMF loans, then after the loans were made, and the money delivered to Russia, they stole much of it. I suppose the reason he’s still alive is that there were Russians in power that were involved.
As typical for IMF loans, Russia didn’t benefit from the loans, but was on the hook for the debt. Russia doubled down and paid it off completely. They successfully stopped much of the privatization effort that was underway by the IMF.
And their ‘new age of prosperity’ has since ensued.
I don’t know if there are other instances of nation’s successfully thwarting the plans of the bankers so completely and turning their debt around. I think this is a one off event and may be linked to some notable assassinations in the banking sector that accord in this period.
The fear of a slow and agonizing death, may be the only thing that can counter an IMF banker’s greed.
Thanks for the update. I knew that Russia had paid off FSU’s loan, but didn’t know the history.
The story would make a great motion picture. 🙂
You make a good and unique point about Russia’s depressed consumption/production.
Also during this phase Russia had asset stripping. Public assets are outright stolen or sold for pennies on the dollar. We in US and EU would do well to remember the asset stripping phase.
Yes, asset-stripping was a problem then, and could be again. I understand whole factories were dismantled, and sold. Without those assets, it was probably much less possible to have as many jobs as before. The permanent loss of jobs added to the problem. It is hard to see from the consumption data that the high-paying jobs have ever really come back.
Could it be because of Russia’s ongoing demographic decline?
I think Russia’s ongoing demographic decline is caused by the declining resources, not the other way around. Things are so bad, outside a few big cities, that people are more or less giving up.
Part of this is related to jobs. If there are jobs, and people can earn good wages, oil use will expand for two reasons:
(1) The jobs themselves need oil, for production and transportation of goods.
(2) People with good jobs can buy cars and other things that use oil, or are made with oil.
Pretty clearly, oil use is not expanding back to the level it was before. It looks like manufacturing and other types of jobs left Russia, and never came back.
Gail
I find your latest piece a very interesting comparison.
One or two quibbles:
Inevitably you must paint with a broad brush, but bear in mind that fertility rates for women have fallen across W Europe, as well as in E & C & S Europe (ex-Soviet bloc). Inside the EU the most obvious example is Italy, but similar falls are seen across most of the prosperous countries of the EU where GDP per capita is much greater than in FSU. This changing demographic has been going on for 30 years and was seen earliest in very prosperous Scandanavia.
The Soviet Union had become a major primary food producer before its break-up. (A bit of a myth seems to have grown up around this – Orlov on this appears to me to be historically inaccurate). I personally witnessed some of the remains of collapsed agricultural systems in for example Poland and Bulgaria, and similarly in the former Yugoslavia.
Although cereal yields always fluctuate year to year, this quote from a 1999 paper by Prof Tim Dyson makes the point:
“Consider, for example, that in 1990 the Soviet Union had a near-record cereal harvest of 227 million tons, but by 1995 the component countries of the FSU produced only 122 million tons of cereals. A decline of 105 million tons is roughly equivalent to losing production equal to about 4 years of growth in world cereal demand”.
I haven’t figured out where one gets good databases that go from, say, 1970 to the present, but the quote you give is very much in line with what the fossil fuel consumption data is showing–things are not nearly as good now, as they were years ago, for the average Russian citizen.
My impression is that a decline in life expectancy, especially of men, is very much a feature of the population decline in Russia. I doubt that is an issue in Scandinavia. People who don’t have jobs that they are interested in, and don’t have much hope for the future, seem to me to be predisposed to excessive drinking, and general carelessness. This Wikipedia article says:
Gail
Thanks for your reply.
Dyson’s figures that I quote do not tell the whole story.
We need also to distinguish the USSR and FSU from the Russian Federation, and countries that were never part of USSR but were part of the Soviet bloc.
I am reading a FAO document http://www.fao.org/docrep/007/y5069e/y5069e03.htm
In the 1980s, USSR was a large grain importer in order to support livestock production, and much of the 36Mt per year went to Russia. After the transition, production of livestock fell 66%.
Regarding the dramatic increase in mortality of adults, particularly for men, most of this was from cardiovascular diseases. The following quote indicates that the underlying arterial disease probably had increased over previous decades (a similar increase had been true for earlier epidemics in western countries peaking in the 1960s/70s). During the transition, the prompt risk of sudden events rose very sharply, probably from an increase in smoking and other unhealthy behaviors. An increase in smoking for example is known to raise,within days, risks of a prompt event for already ‘middle-aged’ unhealthy arteries.
QUOTE The Russian literature on nutrition has traditionally emphasized case studies with few references to nutrition policy. However, nutrition has come under great scrutiny in studies outside the region in the past ten years in connection with the drastic fall in life expectancy and deterioration of health conditions in the Russian Federation. Martinchik, Baturin and Helsing (1997) reported on the results of a WHO monitoring effort of Moscow schoolchildren from 1992 to 1995. They found that, although Russians felt that they had been food deprived during the period, there is no evidence that growth of children in the study had been compromised. Popkin et al. (1997a) reviewed the history of the nutritional changes from the 1960s to 1990s in Russia and, relying on data from the Russian Longitudinal Monitoring Survey (RLMS) of 1992 and 1993, noted the main health problems which arose during the period. Their findings, similar to those in Sedik (1993) and Van Atta (1993), are that the Russian diet changed dramatically from the 1960s to the early 1990s from one dominated by bread and potatoes to one with high meat and dairy content. These diet changes led to a rise in health problems of the population related to heart and circulatory diseases, maladies normally associated with richer countries.”
Great summary. We fail to use the FSU as an example to our peril.
Those interested in more in-depth analysis of the US versus FSU should get “Reinventing Collapse,” by Dmitry Orlov, which completely backs up Gail’s analysis. He also has a popular and very interesting blog.
I am a great fan of Dmitry Orlov’s. I did a little summary of his book on The Oil Drum, when it first came out. I understand he has a revised, expanded edition out now.