Peak Oil and the Fall of the Soviet Union
By Douglas B. Reynolds
After over 70 years in power, the mighty Soviet Empire unexpectedly vanished overnight and almost the entire communist tradition there dissolved. Was the cause of this cataclysmic collapse really the result of communist inefficiency and U.S. president Ronald Reagan’s Cold War military build up? Or was there an oil crisis that shocked the Soviet system? Or if Marxist-Leninist communism was so inefficient, then why did it last for over 70 years, through World War II and early Cold War tensions that were arguably also strong enough to have toppled it?
This subject is addressed in my book, Scarcity and Growth Considering Oil and Energy: An Alternative Neo-Classical View, and in a forthcoming article co-authored with Marek Kolodziej. Our evidence shows that an oil production decline preceded the GDP decline of the Soviet Union, and therefore that the fall of the Soviet Union was not caused by President Ronald Reagan’s cold war military build up or by Soviet economic mismanagement, as many conservative pundits would like us to believe. Rather it was caused by an oil crisis.
The Soviet Union experienced peak oil first hand—a 43% decline in domestic oil production between 1987 and 1996. This crisis caused Soviet society to fall into devastating economic impoverishment. Can this be proven? Yes. Here is the quick story: The oil decline in the Soviet Union preceded the GDP decline. A statistical test, Granger causality, shows this. Oil decline did not follow the GDP decline, it was ahead of it, and therefore it caused it. However, Granger causality is not always sufficient proof; more evidence is needed.
For example, you could argue that the oil decline happened because of internal economic chaos – independent of oil scarcity. It is possible that due to spending so much of the Soviet GDP on military build-ups, the Soviet Union didn’t have money to pay oil workers. But, Soviet coal production declined after GDP started declining. How could this internal chaos have caused reductions only in oil production but none in coal production prior to the GDP decline? If you argue that Cold War military expansion precluded oil sector spending to keep oil production high, then why would not it have also precluded coal sector spending at the same time? Also, natural gas production was not affected during the Soviet collapse. Again, why would internal chaos arbitrarily affect oil before the collapse, but not natural gas? Thus it was scarcity of oil and not internal inefficiency that caused the oil to decline.
Still, why did oil production increase after post-Soviet markets were freed? After all, if oil production increased after the fall of the Soviet Union then surely that proves the oil production decrease was due to Soviet inefficiency. The answer is that the Soviet Union was a closed system and had its own technologies and market mechanisms within that system. Thus the Soviets hit against scarcity within the confines of their own technological and political world. After the political system changed, their oil fields were reinvigorated with new technology and management from outside the old Soviet system. Under the old system the Soviets were only able to extract about two thirds as much oil as modern western technologies. But that doesn’t mean scarcity did not cause their decline. Scarcity caused the decline within their system.
Remember, Soviet oil production increased from 1930 all the way to 1987 under a Soviet system using Soviet technology. If Soviet inefficiency caused the post-1988 oil decline then why didn’t it also cause oil production to decline during the 1950s and 1960s? Clearly their inefficient technology was efficient enough to increase production as long as their reserves were vast enough. Once the reserve base was less bountiful, their technology reached its limits and scarcity ensued. Any region with a given technological and economic system would eventually peak, such as the United States itself where we produce half as much oil now as we did in 1970 even with the best technologies and economic system available.
Like the Anasazi, the Mayans and the Romans themselves, the Soviet Empire fell as our own economy may. Our fall could be exactly like the Soviet fall if we don’t prepare now. We are faced like the Soviets with Jared Diamond’s scenario where Diamond in his book, Collapse, shows that many civilizations faced economic decline. I think people don’t want to believe the Jared Diamond “collapse scenario” is upon us because they expect that technology will save us… and it might. However, what the Soviet collapse shows is how quickly and how severely an economy can be hit by oil scarcity. And in fact, the Soviets were aware of possible problems and did invest in such alternative technologies as solar energy and geothermal power before the fall, but were still unable to stop the collapse. It is easy now to give Soviet communism short shrift, even though we ourselves were once terrified of the Red Scare. Yet the Soviet fall may be a precursor to our own.
Douglas B. Reynolds, PhD., is an associate professor of oil and energy economics at the University of Alaska at Fairbanks. Author of several books and numerous articles, he has also served as a consultant to Alaska’s state legislature about the proposed natural gas pipeline.