Crisis amid Plenty: The Politics of Soviet Energy under Brezhnev and Gorbachev

by Thane Gustafson

Overview

Although the Soviet Union has the most abundant energy reserves of any country, energy policy has been the single most disruptive factor in its industry since the mid-1970s. This major case study treats the paradox of the energy crisis as an essential part of larger economic problems of the Soviet Union and as a key issue in determining the fate of the Gorbachev reforms.

Originally published in 1989.

The Princeton Legacy Library uses the latest print-on-demand technology to again make available previously out-of-print books from the distinguished backlist of Princeton University Press. These editions preserve the original texts of these important books while presenting them in durable paperback and hardcover editions. The goal of the Princeton Legacy Library is to vastly increase access to the rich scholarly heritage found in the thousands of books published by Princeton University Press since its founding in 1905.

Product Details

ISBN-13:	9780691608228
Publisher:	Princeton University Press
Publication date:	07/14/2014
Series:	Princeton Legacy Library , #1028
Pages:	390
Product dimensions:	9.90(w) x 6.90(h) x 1.00(d)

Read an Excerpt

Crisis Amid Plenty

The Politics of Soviet Energy Under Brezhnev and Gorbachev

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By Thane Gustafson

PRINCETON UNIVERSITY PRESS

Copyright © 1989 The Rand Corporation
All rights reserved.
ISBN: 978-0-691-07835-9

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CHAPTER 1

THE SOVIET ENERGY CRISIS AND THE PROBLEM OF REFORM

The Soviet economy will not be reformed soon. The experience of such command economies as Hungary and China shows how difficult and drawn-out an undertaking reform is, and there are as yet no conclusive successes to point to. It is already clear that the same long road of trial and error awaits Gorbachev and the Soviet reformers. This has produced two sorts of pessimism among Western observers. For the economist, Gorbachev's reforms have not yet gone far enough, because they do not yet go to the heart of the command economy. For the political scientist, they have already gone too far, arousing opposition and unleashing forces the reformers cannot control.

If both of these pessimists are right, then the task of reform in the Soviet Union is not merely herculean but impossible. Yet, is there no gradual middle course that can be both economically and politically viable? That is, after all, the crucial question of any reform, since what makes reform different from revolution is that it attempts to salvage the essence of the established system by adapting it, not overturning it. Between the opposite dangers of excess and inaction, upheaval and paralysis, can an able Soviet leader thread a way?

That depends on just what is wrong in the first place. One of the most important events of the last half-century has been the rise and fall of the Soviet model of economic development. As late as 1960, the Soviet economy appeared to be the most dynamic on the face of the earth. Soviet technology had put the first man-made satellite in space and rivaled the United States in advanced weapons development. Soviet industry, after successfully repairing the damage done by World War II, had grown at awesome speed throughout the 1950s. But by 1985 the contrast could not have been more complete.

What caused the long slowdown that began in the 1960s, culminating in the crisis of the latter half of Brezhnev's reign, which brought the Soviet economy to a standstill and launched Mikhail Gorbachev on his extraordinary career? Most Western observers — and on this point the political scientists are at one with the economists — take it as an axiom that the secular slide of the Soviet economy since the 1960s is "systemic," that is, rooted in the politico-economic structure of the system. The gist of their case is that the Stalinist strategy of development is exhausted, and along with it the politico-economic structure that serves it. To be sure, there is life in the body yet: degenerative diseases do not conquer the patient overnight, especially so rugged a one as Stalin's progeny. Thus Seweryn Bialer a decade ago distinguished between the "crisis of effectiveness" that loomed before the Soviet Union then and the "crisis of survival" that might threaten it tomorrow.

But for understanding the reformers' predicament, strategy, and prospects, this level of explanation is too broad. A more precise interpretation of the decade is necessary. Just what caused the accumulated ills and dysfunctions of the command system to come together in a simultaneous crisis of industry, agriculture, society, and politics? And why just at the end of the Brezhnev era?

Here is an instance of the most difficult problem in historical explanation and political analysis: to weigh the roles of "structure" and "event" and to understand the place of individuals within them. "Systems," after all, do not allocate resources, design programs, give advice, or make decisions. If the command system creates distorted signals and incentives, it is still the responses of the leaders that will either aggravate the consequences or offset them, delay a crisis or precipitate one. The Soviet slide under Brezhnev is a case in point. Its timing, course, and consequences cannot be understood without examining the part played by leadership and policy, and specifically by Brezhnev himself. The implications for the reformer are obvious: if specific errors of leadership were a major factor in precipitating a crisis, then correcting those first will buy the reformer precious time and room.

It follows that we will not have a clear picture of the sources of the crisis of the last decade, or of the roots of the present reform movement, or of its prospects until we get down to cases. That is already happening, as economists and political scientists begin to take a closer look at the biggest trouble spots of the decade: agriculture, military-industrial affairs, manpower, and transportation. The subject of the present book is the special trouble spot of energy.

At the book's core is the story of a paradox. Energy is the essential foundation of any industrial economy, and in its abundance of energy the Soviet Union is the mightiest of superpowers. It is the world's largest producer of oil and gas and the third largest producer of coal. Inside its borders are the most plentiful energy reserves of any country. Yet for the last decade the Soviets have been in the throes of an energy crisis. It is not a crisis of penury (in particular, the Soviets are not about to run out of oil) but one of runaway costs, abysmal inefficiency, and repeated shocks and surprises. Moscow's struggles to deal with it have been so demanding and so expensive that energy policy has been the single most disruptive factor in Soviet industry since the mid-1970s and one of the leading proximate causes of the downturn and stagnation of Soviet economic growth. Yet, despite a decade as the Kremlin's most urgent industrial problem, the Soviet energy crisis is far from resolved. For the reformers under Mikhail Gorbachev no other issue of economic policy is so great an obstacle to their plans.

How much of the energy crisis of the last decade is due to systemic diseases and how much to the mistakes of a deficient political leadership? Gorbachev blames both. The Soviet economy, he argues, has outgrown the system that created it; but the resulting difficulties were made worse by blind leaders. As he told the Central Committee of the Communist Party of the Soviet Union (CPSU) in January 1987: "The main cause — and the Politburo considers it necessary to say so with utmost frankness at the plenary meeting — was that the CPSU Central Committee and the leadership of the country failed, primarily for subjective reasons, to see in time and in full the need for change and the danger of intensification of crisis phenomena [krizisnye iavleniia] in society and to formulate a clear policy for overcoming them." In Gorbachev's list of mistakes energy figures especially prominently: "The striving to restrain the fall of growth rates led to making inordinate expenditures to expand the fuels-and-energy sector, to bringing new natural resources into production at forced rates, and to using them irrationally." Capital productivity in the extractive sector plummeted, and the previous leadership made up for it by pouring in scarce labor. One of the worst "irrational uses," Gorbachev continued, was excessive energy exports; the hard currency bought with them was wasted on "current tasks" rather than on modernizing the economy. In plain speech, what turned a systemic decline into a crisis was Brezhnev.

Is Gorbachev right? Or rather, to what extent is he right? What part of the energy crisis might reasonably have been avoided by a Brezhnev leadership that, while staying "in character," operating within the circumstances, perceptions, and political consensus of its time, and using the instruments available to it, might have used them better, more wisely, more consistently, or with greater foresight? In other words, did it make avoidable mistakes? Or was it defeated by forces it did not understand and could not respond to, dragged down, in addition, by the contradictions and inertia of a physical structure built up over the previous two generations? The question is obviously crucial for Gorbachev or any would-be reformer because it bears on the cardinal questions we raised at the outset. Can Gorbachev do better? How much time and running room does he have? What balance of improved "within-system" policy and radical reform might work?

This book has two aims. First, I will explain the crisis that struck the energy sector in the mid-1970s and analyze the policies that accompanied it, attempting to disentangle the systemic causes from those traceable to the political leadership. In focusing on the two core industries of the energy sector, oil and gas, and on the gathering troubles facing both, I will ask: Did the leaders not know what was happening? How soon did they find out and how did the news reach them? Was there conflict among them or among groups, factions, or institutions? If so, what was at issue? Did political or institutional conflict inhibit or distort effective action? When there was action, did it have the expected results, and if not, why not? Were the leaders well advised, and did they or their experts show the capacity to learn as time went on?

I will also examine the systemic causes of the energy crisis. What were the consequences of the pricing system for energy? What effects did organizational structure have on policy and its implementation? Why did the central planning process perform as it did? What explains the low level of technological innovation in the oil and gas industries and the wasteful use of manpower? What accounts for the poorly planned and inefficient use of foreign equipment? Finally, I will explore the interaction of system and leadership. How did the leaders attempt to deal with the biases produced by the system? Did they offset them or aggravate them? How did various actors outside the top leadership, such as regional authorities and the Party apparatus, deal with systemic distortions?

The second broad aim of this book is to show the place of the energy sector in the Soviet reform problem. Both as cause and as symbol, the energy sector is one of the most visible and difficult problems the reformers face. For the moment, Gorbachev is having better luck with energy than his predecessors; indeed, at this writing the fuels sector is the only part of the economy that is giving good results, partly because of a tightening up that began in 1985. But it is significant — and ominous — that Gorbachev's approach to energy policy is so far almost indistinguishable from Brezhnev's in its two most dangerous aspects: the rapid rise of energy investment and the failure to curb energy consumption. Why is that? Is reform so difficult in the energy sector? I will show why finding "middle roads" to reform should actually be easier in the energy sector than in much of the rest of the economy, and I will argue that in this particular case middle roads are indeed available, opening ways for the reformers to cope with the energy crisis. But if that is the case, why is Gorbachev not taking them?

The Soviet Energy Crisis in Comparative Perspective

This is a book about Soviet politics and policymaking, not about comparative political economy. In particular, it is not meant as yet another indictment of government ownership or state intervention in the economy. Yet the Western reader is bound to wonder whether Soviet energy policies have been better or worse than those of the West, and therefore it is of interest to put the Soviet energy crisis in comparative perspective.

In some ultimate sense, the Western and the Soviet energy crises shared similar causes. Both stemmed from rising energy costs, and both struck economies grown used to cheap oil. Both were aggravated by the poor foresight of governments and industrial planners. In both the threat of shortage was followed by massive and lasting reallocations of resources.

But there the similarities end. In the West a relatively small constriction of supply twice sent energy prices soaring between 1973 and 1981, engendering a host of consequences. Compared to this market response, changes in government policies came late and, in most cases, had less important effects. In the Soviet Union, the reverse was true: the sudden perception of emergency (though belated) brought first a jolting change in government policy. Price responses came more slowly, trailing behind rapidly rising real costs, and had little effect on policy or behavior.

In the West, the result was broad and rapid adaptation by both producers and consumers; in the Soviet Union the adaptations came mainly on the production side. Western exploration and development boomed in all major energy sources, supported by rapid technological innovation that was quickly diffused worldwide. In the Soviet Union the supply response took the form of massive campaigns to boost hydrocarbons and nuclear power, while coal was neglected. These campaigns were conducted with inadequate attention to industrial support, technological innovation, or long-term strategy. The energy sector, though it provided the Soviet Union with most of its hard-currency earnings, failed in the main to exploit Western equipment and know-how, despite a handful of notable exceptions.

But the greatest differences are on the demand side. In the West, higher prices soon led to large reductions in energy use, effectively severing the once close tie between economic growth and energy consumption. Oil consumption in the developed West dropped sharply, both in absolute volume and as a share of total energy use; and despite lower prices and substantial economic growth in recent years, it has been slow to recover. In the Soviet Union there has been little effective energy-saving response to date and only the slightest decline in oil consumption — a decline that is likely to be reversed if the Gorbachev program of accelerated growth is at all successful. Ironically, the most powerful incentive for the Soviets to conserve energy was not the rise of world energy prices in the 1970s but their decline in the 1980s, which cut Soviet hard-currency income and stimulated them to free more oil for export.

One important structural reason the Soviets have been slow to conserve energy is that heavy industry continues to dominate energy consumption. Some of the most dramatic Western savings occurred because consumers drove their cars less and heated their homes more efficiently. In the Soviet Union such savings have been almost entirely absent. But the greatest shortcoming has been the Soviet failure to curb industrial consumption, where the West also did well.

By the mid-1980s the Soviet energy problem had become virtually the exact opposite of that of the West. The latter, having broadened its sources and cut its consumption, now faces periodic oversupply and erratic prices, though it remains dangerously dependent on the volatile Persian Gulf. The Soviet Union, though it has sharply expanded gas output and has so far avoided a collapse in oil production, and though it remains the only major industrial power fully self-sufficient in energy, is also the only one still threatened with shortages and bottlenecks, which it has prevented only through massive spending. In the West energy consumption has become much more efficient than before; in the Soviet Union it has not. In the West energy investment and exploration are sharply down; but the Soviets are investing and exploring more and more, as energy continues to drive the leaders' choices. Natural gas, despite its high cost, is being developed as fast as the Soviets can pipe it to consumers, and in the oil fields they are desperately producing every barrel they can. This paradoxical mixture of success within failure and failure within success sets the Soviet version of the energy problem decisively apart.

Explaining the Soviet Energy Crisis

To preview briefly one of this book's main findings: Soviet energy policy over the last decade and a half has been unbalanced, unstable, and ridden with conflict. These features have worked against the leaders' aims and narrowed their options. The central question is: What accounts for these features and why have they endured, right down to the latest decisions of the Gorbachev leadership?

The Impact of the System

There is a large and excellent literature, spanning two generations, on the functions and malfunctions of command economies. Its main implications for policymaking can be summed up under three themes. First, command systems generate false, incomplete, and inappropriate information, and they put it in the wrong hands. The price system yields misleading signals about supply and demand, particularly for new products and services. Interest rates and discount rates do not reflect society's attitudes (and only imperfectly those of the leaders) toward risk or trade-offs between present and future. Information moves vertically but not horizontally. Those who must make decisions lack good data, while those who have the best data are not responsible for decisions. Plans based on faulty information are unrealizable from the start.

Second, command systems generate irrational incentives and conflicting preferences and provide no way to reconcile them other than cumbersome negotiation or administrative pressure. There is either too little incentive to innovate or too much, and the result is alternately technological stagnation or gold plating. Distorted rewards and a lack of hard financial constraints encourage overuse of all inputs, disregard of quality standards and delivery schedules, and inattention to customer wants.

Third, as a consequence, the objectives set by policymakers are severely distorted in execution. Inputs reach the field in neither the mix nor the sequence required, and they are then used in ways that were not intended. Local producers pass the consequences on to their customers and misreport the results to their superiors, thus setting the stage for the next round of defective policymaking.

(Continues...)

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Excerpted from Crisis Amid Plenty by Thane Gustafson. Copyright © 1989 The Rand Corporation. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

• FrontMatter, pg. i
• CONTENTS, pg. vii
• MAPS AND FIGURES, pg. ix
• TABLES, pg. xi
• PREFACE, pg. xv
• ACKNOWLEDGMENTS, pg. xix
• ABBREVIATIONS AND ACRONYMS, pg. xxiii
• ONE. The Soviet Energy Crisis and the Problem of Reform, pg. 1
• Two. The Evolution of Soviet Energy Policy, 1970-1988, pg. 22
• THREE. Origins of the First Soviet Oil Crisis, 1970-1982, pg. 63
• FOUR. The Second Oil Crisis, 1982-1988, pg. 100
• FIVE. The Soviet Gas Campaign, 1970-1988, pg. 137
• SIX. Industrial Support for the Oil and Gas Campaigns: The Interaction of Domestic Policy and Import Strategy, pg. 182
• SEVEN. The Slow Move to Conservation, pg. 227
• EIGHT. Soviet Energy Exports: From Free Ride to Rude Awakening, pg. 263
• NINE. Explaining the Soviet Energy Crisis: System versus Leadership, pg. 289
• EPILOGUE, pg. 338
• APPENDIX: Drilling Statistics, pg. 341
• INDEX, pg. 347

Editorial Reviews

"Crisis amid Plenty is a well-crafted scholarly study. Although the focus is on the petroleum industry, this book offers a valuable window through which to view recent economic change in the Soviet Union. The energy analyst and anyone with a serious interest in Soviet economic decision making will benefit from studying this book."—-Russell Mellett, Canadian Business Review

From the Publisher

"This book...provides an instructive example of how difficult it is to achieve efficient allocation when the system is driven by political policy. [Crisis amid Plenty] should interest Soviet specialists, in both universities and government, and prove instructive for students of the Soviet economic system, graduate or undergraduate."

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