Soviet Oil Production

The decline in world oil prices, initiated by the US government, shook the economy of the USSR. “The date of the USSR’s collapse is well known. It’s not the day of the Belovezha Accords, nor the August coup [of 1991]. It was Sept. 13, 1985 when Saudi Arabia’s Minister of Oil, [Ahmed] Yamani, declared that Saudi Arabia was quitting the agreement on oil production restraint, and started to boost its share in the oil market. After this, Saudi Arabia increased oil production by 5.5 fold, and oil prices dropped by 6.1 fold,” wrote Egor Gaidar, the architect of radical economic reforms in post-Soviet Russia in the 1990s.

Petr Aven, who was the Minister of Foreign Economic Relations in Gaidar’s cabinet, and later an influential businessman, supported this interpretation: “It was a major turning point in 1986 when oil prices fell and all possibilities to generate revenue[for the USSR] crumbled.” As Aven points out, oil revenues provided funds needed to purchase grain (17 percent of the Soviet grain was imported). The money was also used to “bribe the elites” in the form of consumer goods that the state bought from the West since the USSR could not produce items of such quality), and to make them available to the upper stratum. Falling oil prices coincided with the economic slowdown that, according to Aven, started in the 1960s. This long-term trend, compounded by the decline in oil revenue, led to the collapse of the Soviet economic model.

The Soviet Union was richly endowed with almost every major category of natural resource. Drawing upon its vast holdings, it became the world leader in the production of oil, iron ore, manganese, and asbestos. It had the world's largest proven reserves of natural gas, and in 1984 it surpassed the United States in the production of this increasingly important fuel.

An ambitious Sixth Five-Year Plan was launched in 1956. After initial revision, prompted at least in part by political considerations, the regime abandoned the plan in 1957 to make way for a seven-year plan (subsequently reduced to a five-year plan) that focused particularly on coal and oil production and the chemical industry. Khrushchev, who became principal leader after 1956, took particular interest in these areas of production.

During the last years of Brezhnev's rule, the leadership remained relatively complacent about the system despite the economy's slowing growth rates. Increases in world oil and gold prices contributed to this attitude because they enhanced hard-currency purchasing power in the early 1970s and made it possible to import increasing amounts of Western technology.

In the 1980s, fuels presented formidable problems for Soviet planners. Although the Soviet Union possessed enormous fuel reserves, it was difficult to balance extraction and transport costs, even as the drive continued for greater production levels. Fuel availability was a prime consideration in locating new industry. And long-term investment planning faced choices among coal, oil, and natural gas. Choices leaned strongly in the late 1980s toward gas over oil because of the greater reserves and cheaper transport of gas. Nevertheless, efforts also continued to formulate a "coal strategy" that would return coal to its former prominence. In 1988 about 28 percent of total national investment went into the Soviet fuel and energy complex, compared with nearly 12 percent in 1980.

The Soviet Union was self- sufficient in the three major fuels that drive its industry: coal, natural gas, and oil. It had long been a major exporter of oil and gas to its allies and to the West, and hard currency from those exports has financed the purchase of critical import commodities. In 1985 fuel and energy export provided 60 percent of Soviet hard-currency income. The question of which of the three major fuels should be emphasized has been a matter of continuous scrutiny and adjustment in government policy. The two largest users of coal are by far the metallurgy and electric power industries. Large amounts of oil products go for electric power, agriculture, transportation, and export; large amounts of natural gas go for electric power, metallurgy, the chemical industry, construction materials, and export.

After many years of occasionally spectacular growth, Soviet oil production began to level off in 1983, although the Soviet Union remained the world's largest oil producer. Since that time, Western experts disagreed sharply about the amount and importance of production changes, especially because exact Soviet fuel reserve figures remained a state secret. It is known that at the end of the 1980s oil production did not increase significantly from year to year. The Tyumen' reserves of western Siberia were a huge discovery of the 1960s that provided the bulk of oil production increases through the 1970s. By the end of that decade, Tyumen' had overtaken the Volga-Ural fields as the greatest Soviet oil region. The Volga-Ural fields had provided one-half the country's oil in the early 1970s but fell to a one-third share in 1977.

By the mid-1980s, Tyumen' produced 60 percent of Soviet oil, but there was already evidence that Tyumen' was approaching peak production. Meanwhile, new policies in the early 1980s accelerated drilling rates throughout the country, especially in western Siberia, but lower yields made this drilling expensive. By 1980 the older oil reserves were already being exhausted. Substantial untapped reserves were confirmed in the Caspian, Baltic, and Black seas and above the Arctic Circle, but all of them contained natural obstacles that made exploitation expensive. Soviet planners relied on the discovery of a major new field comparable to those in western Siberia.

But by 1987 no major discovery had been made for twenty-two years. In the mid-1980s, Soviet oil exploration concentrated on the farther reaches of the Tyumen' and Tomsk oblasts (see Glossary), east of the established western Siberian fields. Offshore drilling was centered on the Caspian, Barents, and Baltic seas and the Sea of Okhotsk. Several shipyards were building offshore drilling platforms, the largest being the yards at Astrakhan' and Vyborg. Foreign shipyards also provided offshore drilling equipment. In 1984 the Soviet Union had eleven semi-submersible platforms in operation.

The Soviet oil-drilling industry has relied heavily on Western equipment for difficult extraction conditions, which become more common as existing reserves dry up. The average service life of a Soviet-made drilling rig was ten years, compared with fifteen or twenty for comparable Western equipment. Centers of Soviet drilling rig production were in Volgograd, Sverdlovsk, and Verkhnyaya Pyshma, about twenty kilometers north of Sverdlovsk.

Increased distance from well to consumer was also a major concern for the oil industry. Ninety percent of oil was transported by pipeline. The Soviet oil pipeline system doubled in length between 1970 and 1983, reaching 76,200 kilometers. Before 1960 the system totaled only 15,000 kilometers of pipe. As oil production leveled off in the 1980s, so did pipeline construction. In 1986 the Soviet Union had 81,500 kilometers of pipeline for crude and refined oil products (in 1989 the number of kilometers remained the same).

The oil boom of the 1970s in western Siberia brought rapid growth of Soviet oil-refining centers. In 1983 most of the fifty-three refineries were west of the Urals. At least five new facilities were built between 1970 and 1985. Soviet refining equipment fell below Western standards for such higher-grade fuels as gasoline, so that high-octane fuels were scarce and heavier petroleum products were in surplus.

In the late 1980s, Soviet foreign indebtedness, principally to West European commercial banks, rose substantially, reaching US$54 billion in 1989, in part because the price of oil and natural gas, the main hardcurrency exports, fell on the world market. Soviet exports to communist and other socialist countries consisted primarily of energy, manufactures, and consumer goods. In mid- 1991 increasing hardcurrency indebtedness, decreasing oil production, mounting domestic economic problems, and a requirement for advanced technology forced Gorbachev to seek increased participation in international economic organizations, trade with foreign countries, foreign economic assistance, and reduction of unprofitable trade with the Soviet Union's allies.