Russian Energy: A Blessing and a Curse.

• Author: Goldman, Marshall I.

No study of world energy would be complete without including Russia. Yet despite so much potential, this resource-rich country has failed to take full advantage of its energy abundance. Through its egregious mismanagement of these resources, Russia has become one of the world's most inefficient and wasteful producers and consumers of energy.(1) This is due in part to the presumption that there will always be more oil or gas to be discovered, and, as a result, there is no particular need for Russia to use what it has efficiently.

Historically Russia has frequently been a major player in the energy game. For a time during the late czarist era at the turn of the 19th century, Russia was the world's largest exporter of petroleum. Almost half a century later, one of Hitler's targets was the oil fields of Baku, today a part of Azerbaijan but then a part of the Soviet empire.

After the Second World War, the Soviet Union developed other oil fields, particularly in Western Siberia, and by the 1970s, though its deposits were not as large as Saudi Arabia's, it surpassed the United States as the world's largest producer of petroleum. Russia briefly became the world's largest exporter once again when the Organization of Petroleum Exporting Countries (OPEC) tried to impose an embargo on the West in 1973. Furthermore, with the world's largest natural gas deposits, by 1993 it had become the world's largest exporter of natural gas, a status it still retains (see Table 1).

TABLE 1 Producers (in 1996) and Exporters (in 1995) of Crude Oil and Natural Gas (in million tons [Mt] and million cubic meters [M[m.sup.3]])

% of Crude Oil World Crude Oil Producers Mt Total Exporters Mt Saudi Arabia 431 12.7 Saudi Arabia 337 United States 388 11.4 Iran 130 Russia 301 8.9 Norway 126 Iran 184 5.4 Russia 122 Venezuela 169 5.0 Venezuela 99 % of Natural Gas World Natural Gas Producers M[m.sup.3] Total Exporters M[m.sup.3] Russia 587,657 25.4 Russia 191,571 United States 542,211 23.5 Canada 79,114 Canada 164,977 7.1 Netherlands 40,672 Netherlands 95,432 4.1 Algeria 37,881 Indonesia 75,195 3.3 Indonesia 32,800 Source: International Energy Agency, Key World Energy Statistics (Paris: International Energy Agency, 1996) pp. 11, 13.

The wasteful and inefficient use of energy so characteristic of Russia today stems from the ideologically driven price relationships established during communism and the priority that era's leaders placed on providing the Soviet military-industrial complex with cheap energy and raw materials. The Soviets intentionally kept energy prices low to stimulate economic growth. Unfortunately these practices became part of the inherited infrastructure of present-day Russia. In what follows, one can see how Russia's reliance on the abundance of its natural resources has led it to adopt not only wasteful production practices but an inefficient economic system. Moreover, Russia's immense supply of valuable natural resources almost guaranteed the enormous corruption and theft that resulted from the privatization of state industry Too much was up for grabs and the rewards for unethical behavior were too high. That sorry failure accounts in large part for the precipitous drop in the present day output of all of Russia's energy sources. For Russia, energy has been both a blessing and a curse.

ENERGY POLITICS IN THE SOVIET UNION

Lenin realized soon after the Bolshevik Revolution that Russia's economic progress would be dependent on the development of the country's energy potential. One of his first efforts at central planning and coordination centered around the creation of the State Electricity Development (GOELRO) program. This initiative aimed to construct a nationwide network of electric power stations. With the advent of the Soviet Five Year Plans, the leadership of the Soviet Union expanded their development efforts to encompass all major energy products including coal, oil and gas. Separate government ministries for each of these resources directed their production and pricing; the latter was decided by political fiat and without regard to market realities.

Whatever one's ultimate assessment of central planning, the Soviets were in some respects very successful in the energy sector. As mentioned above, the Soviet Union gradually overtook the United States to become the world's largest producer of petroleum by the mid-1970s, and by 1993, Russia was the largest producer of natural gas. Yet there is general agreement that in achieving this level of output, especially of petroleum, the Soviets sacrificed much future production.(2) For example, they relied too heavily on water-injection technology to increase the extraction of petroleum. This procedure, which used high-speed injection of water to increase oil extraction rates, resulted in long-run damage to the wells that ultimately limited productive capacity. Such short-term thinking led many observers at the time to predict that despite its vast potential, the Soviet Union would soon start to exhaust its resources.(3) The U.S. Central Intelligence Agency (CIA), for example, issued a report in April 1977 that forecast that by 1985 petroleum output would decline so drastically that the Soviet Union would have to import 175 to 225 million tons of petroleum a year.(4) In fact, Russia did see a modest drop in output in the following years.

FROM COMMUNISM TO PRIVATIZATION

The drop in Russia's energy output continued through the late 1980s and 1990s, primarily a result of the disruption caused by President Mikhail Gorbachev's far-reaching economic reforms, the 1991 breakup of the Soviet Union and the subsequent privatization of the oil fields. Nonetheless, the CIA's prediction notwithstanding, the Russians have not yet been forced to import. In fact, they have continued to increase exports even as total output has been sluggish. One explanation for this is that with the breakup of the Soviet empire, transfers of oil and natural gas to the Ukraine and elsewhere were suddenly considered exports.

Whatever the Soviet Union's problems in producing petroleum, those difficulties seem to have become much more severe in the 1990s after...