Unleashing the Oil Weapon Against Russia: How to Destroy a Great Empire

  • Print

Top Oil Producing Counties
The Pythoness of the Oracle of Delphi told King Croesus that if he were to attack Persia
"a great empire will be destroyed." Croesus did just that, but the great empire which fell
was not the Persian one, but his own.

Do you remember the old Soviet Union? Dubbed as "The Evil Empire" by Ronald Reagan in 1983, it disappeared in a puff of smoke in 1991, crushed under a mountain of debts. The origins of the financial collapse of the Soviet Union are rather well known: it was related to the fall of the oil prices which, in 1985, went down from the equivalent of more than 100 (today's) dollars per barrel in 1980 to about 30 (today's) dollars and stayed low for more than a decade. The Soviet Union was relying on oil exports for its economy and, in addition, it was burdened with huge military expenses. It just couldn't take a drop of more than a factor of three in its oil revenues.

There exists a persistent legend that says that the downfall of the Soviet Union was engineered by a secret agreement of the Western Powers with the Saudi government who agreed to open the spigots of their oil fields in order to bring down oil prices. This is, indeed, nothing more than a legend. Not only do we have no proof that such a secret agreement ever existed, but it is not even true that the Saudis played the role attributed to them. In the 1980s, Saudi Arabia actually tried hard to avoid the downfall in oil prices by reducing (rather than increasing) its oil output; without much success. (Image below from Wikipedia)

Top Oil Producing Counties

It is true, however, that after the first great oil crisis of the 1970s, the world's oil production restarted its growth around 1985. The reasons for the recovery can't be attributed to the work of a group of conspirators sitting in a smoke-filled room. Rather, it was the result of a number of new oil fields starting their production phase, mainly in Alaska and in the North Sea. This was the origin of the drop in oil prices and, indirectly, of the fall of the Soviet Union. (Image below from Wikipedia)

World Oil Production 1979 to 2012

Today, Russia's oil production has recovered from the downfall of Soviet times and the Russian economy is highly dependent on oil exports, much like the old U.S.SR was. So, a drop in oil prices could do a lot of damage to Russia. Given the political situation with the Ukraine crisis, there are speculations that the West is trying to bring down Russia by repeating the same trick that seemed to be so successful in bringing down the old "Evil Empire". Indeed, we are seeing oil prices dropping below $90 per barrel after years of stability around $100. Is it a fluctuation or a trend? Hard to say, but it is being interpreted as the unleashing of the "oil weapon" against Russia on the part of Saudi Arabia.

However, the world of today is not the world of the 1980s. One problem is that Saudi Arabia has shown several times to be able to throttle production down, but never to raise it significantly higher than the present levels; one could even question whether they will be able to maintain them in the future. Then, there is nothing today which could play the role that Alaska and the North Sea fields played in the 1980s. It had been said many times that we would need a "new Saudi Arabia" (or more than one) to offset the decline of the world's oil fields, but we never found it.

Yet, there are good reasons to think that we could see a drop in oil prices in the near future. One factor is the downturn of several of the world's major economies (e.g. Italy). That could lead to a fall of the demand for oil and, consequently, to lower prices (something similar took place with the financial crisis of 2008). Another factor could be the rapidly growing production of unconventional oil (largely in the form of "shale oil") is the U.S. This oil is not being exported in large amounts, but it has reduced the U.S. demand of oil in the world's market. Coupling these two factors, we might well see a considerable drop in oil prices in the near future, although hardly a sustained one. So, would that be the "oil weapon" that will bring Russia to its knees? Maybe, but, as with all weapons, there are side effects to consider.

U.S. Crude Oil Production and Imports

As we said, unconventional oil is playing a major role in maintaining the world's production. The problem is that unconventional oil is often an expensive resource. Then, in the case of shale oil, the decline rate of wells is very fast: the lifetime of a well is of just a few years. So, the shale oil industry needs a continuous influx of new investments to keep producing and it is very sensitive to oil prices. Its recent rise was the result of high prices; low prices might cause its demise. In contrast, conventional oil fields have a lifetime of decades and are relatively immune to short-term variations of oil prices. If we see the situation in these terms, we might legitimately ask against whom the oil weapon is aimed. The U.S. unconventional oil industry might well be its first victim.

History, as we all know, never repeats itself, but it does rhyme. King Croesus, at his times, believed the Delphic Oracle when he was told that he could bring down a great empire if he would attack Persia. He didn't realize that he was going to destroy his own empire. Something similar may be in store for us in the coming years: a drop in oil prices might well bring down a great empire. Which one, however, is all to be seen.

The following article was originally posted at Resource Crisis

See Also

CLICK HERE to subscribe to the free weekly Best of Financial Sense Newsletter .

About Ugo Bardi