The price of oil in perspective

Ed. Note: Boing Boing's current guestblogger Clay Shirky is the author of Here Comes Everybody: The Power of Organizing Without Organizations. He teaches at the Interactive Telecommunications Program at NYU, where he works on the overlap of social and technological networks.

As the price of oil has fallen from its dramatic highs of just a few months, ago, I often find myself thinking back to an essay by Yegor Gaidar, an economist and acting prime minister of Russia from 1991 to 1994. The essay, The Soviet Collapse, is subtitled "Grain and Oil" and tells the story of the end of the Soviet Union as the interaction of the price of those two goods.

The Soviet Collapse starts with the history of centrally-managed grain production, an unmitigated but slow-motion disaster, which they then proceeded to patch by importing grain with the budget surplus from rising oil prices, starting in the 1970s. That worked for a while, and then it stopped working.

The timeline of the collapse of the Soviet Union can be traced to September 13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices, and Saudi Arabia quickly regained its share in the world market. During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed by approximately the same amount in real terms.

As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive. The Soviet leadership was confronted with a difficult decision on how to adjust. [...] the Soviet leadership decided to adopt a policy of effectively disregarding the problem in hopes that it would somehow wither away. Instead of implementing actual reforms, the Soviet Union started to borrow money from abroad while its international credit rating was still strong. It borrowed heavily from 1985 to 1988, but in 1989 the Soviet economy stalled completely.

For an economics essay filled with price and output charts, it's a surprisingly gripping read. It's also a reminder of what's at stake now. Because oil consumption matters more than production to English-speaking countries, our press often covers the price of oil as a question of how often people drive to the mall. For countries like Russia, however, now as much as then, the price of oil has profound existential ramifications. Re-reading this, I got a picture of how geo-politically dramatic 2009 could turn out to be.

The Soviet Collapse: Grain and Oil


  1. FYI: the “sudden and drastic” Saudi decision to drop the oil prices in 1985 was part of the Reagan administration’s strategy to bleed the USSR. Cap Weinberger (Def Sect) and Bill Casey (the CIA Dir.) promised the Saudi’s AWACS planes if they did it.

    Freedom to millions over here where I live (Moscow) did not just happen. We can actually give credit where credit is due for once.

    Reagan and his team also restricted Soviet access to Western credit and technology, while they covertly gave financial and logistical support to Poland’s Solidarity movement (with help from the Vatican, Israel’s Secret service and the Swedes). Reagan also directly helped the Czech underground. But most importantly the campaign to slash Soviet hard currency earnings by driving down the price of oil (with full Saudi cooperation) and the substantial covert aid to the Afghan resistance fighting the Soviet invasion is the reason the Evil Empire landed on the ash heap of history.

  2. The price of oil has severe existential ramifications for us too. Our agricultural complex relies heavily on petroleum-derived nitrogen for a fertilizer more abundant than anything else we had before the world war.

    And of course, farms need tractors, and the trucks that ship to the processing plants and then to the food manufacturers and then to grocery stores need alot of fuel too. I don’t remember the number exactly, but food production accounts for at least 1/6 of our oil consumption.

  3. #3, There’s a reason that Jim Rogers – George Soros’ former partner and one of the few so-called experts to actually predict this collapse and profit from it – is now heavily invested in agriculture.

    Fortunately for Americans, our population density is low enough that we can feed everyone even using less productive methods of farming. That will seriously curtail our exports though, and other parts of the world are not in such a good position. Just look at the food riots and escalating that resulted when we converted part of our production into ethanol. About a billion people depend on petroleum-based fertilizers for survival.

  4. Hard time here and everywhere you go
    Times is harder than ever been before

    And the people are driftin’ from door to door
    Can’t find no heaven, I don’t care where they go

    Hear me tell you people, just before I go
    These hard times will kill you just dry long so

    Well, you hear me singin’ my lonesome song
    These hard times can last us so very long

    If I ever get off this killin’ floor
    I’ll never get down this low no more
    No-no, no-no, I’ll never get down this low no more

    And you say you had money, you better be sure
    ‘Cause these hard times will drive you from door to door

    Sing this song and I ain’t gonna sing no more
    Sing this song and I ain’t gonna sing no more
    These hard times will drive you from door to door

  5. No denying times is hard, sir
    Even harder than the worst pies in London!
    Only lard and nothing more —
    Is that just revolting,
    All greasy and gritty?
    It looks like it’s molting,
    And tastes like,
    Well, pity
    A woman alone,
    With limited wind,
    And the worst pies in London!
    Ah, sir, times is hard,
    Times is hard!

  6. So it was the Saudi’s decision to open the taps that brought down the Soviet Union, and the election of Gorbachev six months earlier had less to do with it?

    The Soviet Union brought itself down. Oil politics and Cold War politics may have accelerated the process, but I think the bottom line is that the time had run out. People were fed up with the combination of economic stagnation (which had persisted since the 70’s) and the lack of freedom.

  7. Soconnor correctly points out that external pressures had a great deal to do with the Soviet collapse as did internal problems. It’s impossible to determine precisely the ratio of significance, but undoubtedly both occurred. The attempt by many post-Soviet Russian historians and economists to remove all credit whatsoever from the West is easily as absurd as the attempt by Reagan-worshipers to give him credit for single-handedly bringing the Soviets down.

  8. Soconner:

    So who decided to collapse The Evil Empire Jr, or was it just an accident?

    Guess the only obvious cure is to launch a war on Iran.

    As for lack of freedom in the old Soviet Union, some of my colleagues back when I worked in Telecom pointed out that, even though they didn’t have a lot of political freedom, in their place of employment they had a lot more say than in any US company. (Not saying this is worse or better, but they did seem to believe that they experienced more freedom on a daily basis than they ever did in the US.)

  9. So the collapse was perpetrated on purpose by some actions that were secret, but that had public and dramatic outcomes. It might have been more obvious what was going on if the rise of Solidarity and Saudi Oil price drops were seen to have a common cause rather than just a coincidence, but how was Long Term Capital Management caught so unaware?

    Did they ignore political news focussing only on economic results? It seems that these days, a group of analysts in the CIA model should be a core component of a hedge fund.

  10. “Because oil consumption matters more than production to English-speaking countries” In terms of price this has only been the case recently because the economic crisis hit oil producing nations, too, and they can’t cut production or they’ll stop making money they so desperately rely on. This is a recent development, though.

  11. Danegeld, thanks, fixed.

    Alex M @11: So it was the Saudi’s decision to open the taps that brought down the Soviet Union, and the election of Gorbachev six months earlier had less to do with it?


    That is main point of the article, written by someone who was part of the Soviet system. In fact, the article is set out specifically as a response to people who hold the belief you seem to, namely that the Soviet system “brought itself down”, something it plainly didn’t do, given that the collapse of European Communism started with demands for freedom in the client states, not at the core.

    I’m going to guess, given your comment, that you haven’t actually read the essay. You should — it’s quite good, and provides a much more nuanced view of things like economic stagnation, which, Gaidar makes clear, was by no means limited to, or even mainly concentrated in the 1970s.

  12. #3, The role of hydrocarbons – methane, specifically – in the production of nitrogen fertilizer is to provide hydrogen. However this isn’t the only way to make nitrogen fertilizer, just the cheapest (at present). The necessary hydrogen can be provided by electrolysis of water, and this method has been used in the past to make fertilizer.
    So while the US is pretty well hooked on hydrocarbons, the “existential ramifications” you allude to are not quite so dire.

  13. It’ll be interesting to see what happens in the USA, e.g. the US government (and also the UK government) is now borrowing as much as possible, while their credit rating is still worth anything.

    How is the USA going to avoid going through a similar collapse to the USSR?

  14. Danegeld:

    “How is the USA going to avoid going through a similar collapse to the USSR?”

    That’s the question of the hour, as far as I’m concerned.

    The only answer available, I think, is that too many other countries already have so much US debt that are forced to double down, or else risk the US going bust and their T-bills and bonds become worthless.

    In other words, everyone has too much at stake to let the US go bust, so maybe that will be enough to hold it together until it can heal a bit.

  15. Mark@17, that’s cool and all, but do you have any idea how much more efficient steam reformation of methane is compared to electrolysis? Essentially, unless we start building out nuclear power plants in large amounts now, we won’t be able to replace methane derived hydrogen anytime in the next few decades.

    I’m not saying that electrolysis won’t work. I’m saying that we likely won’t replace methane derived hydrogen until our back has been broken by lack of fossil fuels. Of course, we still have gigantic coal reserves…

  16. Parlous times indeed. Yeah, synchronized surrender and restart with equitable resource distribution would be how a rational,survival bent species would act. I’m thinking use of tactical nuclear weapons is around the corner. America is broke,the army spent, the wolves are circling and like the guerrilla waging asymmetrical war, so America will have to assert a credible threat by popping the nuclear cherry somewhere. Nukes and cruises already on hand are cheap. Worthless if no one believes you’ll use them. So get someone else to use them first, in a “limited” way. That’ll start a new ball game.

  17. BrightBlue@#2,

    That’s a hell of a link! Scared the shit out of me, looking out of my high window over the snowy suburban fields, imagining the disaster…

    Bad dreams. Nuclear ones.

  18. “don’t believe them, don’t fear them, don’t ask anything of them” good advice. Think I’ll call it the “3D”.

  19. I propose rethinking the use of oil as a fuel at all.

    Petrochemistry is to many Non-combustion energy systems as calcium is to human bone. Plastics in wind farms or tide and wave motors. Plastics as substrate for photovoltaic panels harvesting thermal energy while cooling the PV cells. Plastics for greenhouses attached to living spaces as “Arcology”

    The list is truly inspiring if we rethink what we use plastics for.
    And we’ve some Graduates to convince.

  20. It is time for a year of jubilee in the US.

    1. Eliminate the credit card via act of congress and allow only charge cards.

    2. Forgive Student Loans

    3. Eliminate 3rd World Debt

    Add VAT in the amount of 10% to finance all of the above.

    4. Require 25% of 401K funds to be invested in US Treasuries to reduce dependence upon foreign cash.

    And that’s just a good beginning to turn around the ‘American Way’. . .

  21. 1. Eliminate the credit card via act of congress and allow only charge cards.

    I’m sorry, whaaaaaaaaat.

  22. The Soviet Union did not have a flexible system, they could not adapt quickly to a change in circumstances. The U.S. has a flexible system, with some exceptions. When changes come U.S. industry makes adjustments. Oil ever went to $300.00 a barrel you would see changes, in some cases overnight.

    The U.S. triggered collapse in oil prices worked because of the Soviet Union’s unique situation. Had the situation been different, the result would’ve been different as well.

    And note how Russia has not adapted to the drop in oil prices today. Many of the same flaws that crippled the Soviet economy still bedevil the Russian economy today. Bureaucratic inertia, excessive regulation, plus a failing infrastructure and a falling population means a system ill prepared for change. If anything Russia is even more vulnerable now than back in the late 80s. Changes are coming for Russia, and they won’t be good.

  23. Nanosolar is to be on one hand commended for what they have accomplished. On another hand we have their remaining a private company. With a third hand “Gripping hand?” of keeping their tech “Trade Secret” as being inherently price fixing. I do not begrudge legitimate profits nor a right to retain “ownership” of a process. Yet it would seem that selling access to their tech would make a larger financial return over time. As in a royalty of X cents per Square Meter of audited cell sales. Talk about money for nothing.

  24. I think the article says more about the flaws of inflexible central planning than how dangerous fluctuations the price of oil are. For all the commentators above me, the US is not at all in a similar situation to the USSR 20 years ago.

  25. I definitely mean an elimination of credit cards via the regulatory controls that define usury. People spend more when they use a credit card then they do when they spend cash. I know, I was a banker for 10 years for one of the best banks in the world, but since left that world more than 5 years ago. Credit cards produce more wasteful spending than any other financial product ever created.

    The economy although complex still operates like any system – Input, Process, Output.

    Changing simple rules regarding credit, incentive toward education and investment have profound impacts globally.

    A jubilee would benefit hundreds of millions and at a lower cost than most of the current bailouts proposed. When the incentive to produce is restored to hundreds of millions, economies can expand very quickly.

    Thus, credit cards – gone, student loans – gone, 3rd World Debt – gone and internal financing of public debt. All paid for with 10% VAT and regulation of retirement accounts.

    These issues go to the heart of consumption which drives the demand for oil.

  26. So, does the multiple doublecrossing of that Dossier sabotage then explain Vista? A willful placement of intentionally damaged code?

  27. RE: #30 posted by the23skidoo:

    Let’s consider your post, line by line:

    It is time for a year of jubilee in the US.

    We’ll see…

    1. Eliminate the credit card via act of congress and allow only charge cards.

    Yeah, so everyone can only buy what they can afford right now? That won’t “grow” the economy.

    2. Forgive Student Loans

    To accomplish what? Take the pressure of the barrista at the local Starbucks?

    3. Eliminate 3rd World Debt

    Yeah, we’ll stop giving those poor folks money – they never pay us back anyway…

    Add VAT in the amount of 10% to finance all of the above.

    You seriously think that will cover the tab for the above? Do you have any idea the amount of student loans and third world debt?

    4. Require 25% of 401K funds to be invested in US Treasuries to reduce dependence upon foreign cash.

    You understand that Treasuries are federal debt obligations, so you are requiring taxpayers to buy their own debt, and pay themselves interest on the debt they just bought though their tax payments, right?

    And that’s just a good beginning to turn around the ‘American Way’. . .

    Well, that could be the “change” we were promised…

  28. big players will make out whether they have gold, guns, drugs, favors, whatever. Little players couldn’t buy enough gold or anything to make any difference. Which leaves the few in the middle who can’t/won’t understand what you’ve posted and don’t matter anyway since there are so few of them.

  29. @anonymous
    1. Elimination of credit debt, shifts more than 100 Billion in interest toward immediate real time spending. So yes it is a serious shift and one that would have immediate impact. Since Americans marginal propensity to spend is greater than $1.00 for every $1.00 they receive, the credit card must go away. So yes it grows the economy and simultaneously removes an economic parasite from the economy.

    2. Student loans also are a drag on present spending and apply to far more than the local barrista. In the US we eat our young and watch them start out in great difficulty. It does not have to be this way. Yes I understand the magnitude of the debt, and it is not nearly as large as the bailouts being proposed.

    3. Third World Debt is an unneccesary tool of control and is not typically beneficial for economic development. Eliminate the burden, stop using it for control – and yes those economies will be primed for trade.

    4. Yes I completely understand that those who participate in 401K’s will be buying government debts that will be financed out of future tax revenues. This is no different than the situation with our payroll tax – with the exception that as more Americans own the debt their government creates, an incentive to reign in spending will finally be spread across a large enough population to effect a change away from enormous federal spending toward living within our means.

    And yes a 10% VAT would fund those actions.

    If however, the US wishes to keep bailing out a few under the guise of protecting this entire system, let them continue with that strategy – and this will drag out far longer than necessary.

    As for me, I have been in hard assets for over 10 years, ever since Greenspan spoke of ‘Irrational Exuberance’, so if the US continues it’s current policies, personally I’ll be fine. However I would prefer to live in a country that lives within its means (no credit cards) and invests in its people and its own future.

  30. Takuan:

    A charge card is different from a debit card. Basically, a debit card withdraws cash from your bank account in nearly real time to make a purchase.

    A charge card (like American Express’ main product) is basically a one-month credit card with no interest. The full amount comes due every month, and money is made via the tiny piece of every transaction that Amex charges the merchant for the convenience of payment.

    Users of charge cards must know whether they will have enough money at the end of the month to pay their bill, or if they don’t then their charge card company will quickly stop them from spending until they do. It is far harder (though not impossible) for a charge card balance to build up to large levels that can’t be paid back.

  31. @46 – Takuan,

    The article from the Wall Street Journal describes the AMEX problem more clearly.

    They made ” . . .AmEx made a big push in the past couple of years to let many of its customers keep a balance and pay the interest that accumulates”

    In other words they got into the same silly game that Visa and MC have been playing.

    There charge cards are still doing well compared with their credit cards.

Comments are closed.