ConlTfenliat
The Energy Outlook and
Its Implications for
the USSR and Eastern Europe
Conffdro
National Fortlcn
As*MSmewt Ctfltcr
The Energy Outlook and
Its Implications for
the USSR and Eastern Europe
This paper wis prepared by the I
Office of Economic Research, lt has occnwith the Office of Political Analysis andIntellisence Officer for PoliticalComment* and queries are welcome anddirected to Chief,
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ConfloVniUl
Kftm-ioioi
friruaty IM
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The Enemy Outlook and
Its Implications
the USSR and Eastern Europcl
Constraints in energy supply threaten to push economic growth in the USSR and Eastern Europe to very low levels in.
Asa result, annual increments to national output inay be too small to permit the increases In Investment and consumer goods and services needed to sustain reasonable economic growth and maintain an acceptable level of consumption. If the flow of resourcescd to investment cannot be stemmed without causing future output increments to fall and if defense allocations remain inviolate, consumer welfare and living standards will be severelyall the political hazards that this would entail.
A prospective decline in Soviet oil production is only part of the problem. Coal output is stagnant, and the rapid growth of natural gas production cannot bail the USSR out. becausesubstitution possibilities will remain severely limited through much of. Meanwhile, energy savings through conservation have been and will continue to be limited.
Because Eastern Europe depends so heavily on Soviet energy supplies and cannot afford to buy much oil elsewhere, falling Soviet oil production in theill curtr-il Eastern Europe's economic growth as well.
Soviet leaders remain optimistic about the USSR's energy prospects over tbe very long run. based on coal and nuclear power. They arc. however, very aware ofthc potentially severe oil crunch innd its implications both for their own economy and that of Eastern Europe. Moscow realizes that it must somehow ensure the flow of enough energy orearly stagnant economy and political unrest.
The outlook for obtaining the needed amount of energy ir< the right mix. however, Is dismal. The spiraling price of oil. coupled with slower growth of Western markets, will limit Sovietast European ability in theo pay for the imports of oil required just to sustain even the current consumption levels. Thus, the Soviet and East European leaders realize that ihey must intensify their efforts to obtain oil at concessionary prices from the oil-producing developingarms sales, barter deals, and development assistance. The prospects for concessionary dcils, however, with OPECin the case ofincreasingly poor. Eastern Europe is strapped for hard currency now, severely limiting its purchases. This situation will increasingly apply to the USSR, as it losesoil export earnings andet importer of oil for hard currency in the.
The Soviets may have miscalculated both their own capacity to supply oil to Eastern Europend the East Furopeans'capacity to (I) acquire cil from OPECubstitute coal for oil.educe economic growth and consumption without provoking unrest. The Soviet attitude seems to be that the East Europeans are going to have to pull in their belts just as the Soviets have. Although disturbances in Eastern Europe would be highly undesirable, the USSR may not be prepared tc pay any price to avoid the use of military force, even against Poland.
Faced with the prospectritical Warsaw Pact dependence upon OPEC sources of oil supply, the Soviets could opt for an aggressive policy in the Middle East. They might, in desperation, consider such radical actionnilateral military seizure of Iran's oilfields. Iran's oil supply, secured more or less intact, wouldong way toward alleviating (he economic problems facing tbe Warsaw Pad nations in the. The Soviets would have to weigh this benefit against the extraordinarily high risk involved inj
Confidential
Tbe Energy Outlook and
Its Imputations
tbe USSR and Eastern Europe
USSR
The USSR is the world's leading oil producer,7 million barrels per dayroJucuon growth,has slowed markedly in rectal yean;9 increase ofas the smallest absolute increase0 goal1u been revised downward from ihe originalplanof, but it is unlikely
thai even this Uriel will be reached.
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Oil production Is now declining In all of the major oil* producing regions except West Siberia, and even there gains art uncertain now that the supcrgiant Samotlor oilfield has reached its peak. Samotlor, which has accounted for the bulk of production growth in recent years. Is likely to slump in Ihe nexi year or so and then fall rapidly, Meanwhile, tbe decline already underway in older major producing regions probably willas r. crves ar-depleted. .!
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esult, chants are good that Soviet oil production will peak this year at less thanefore falling.oviet oil output probably will fall toillion andnd is likely to decline still furtherhe upper end of the range predicted3 assumes that exploration is relatively successful, development drilling goes writ, and the Soviets can acquire the needed equipment and technology, mainly from the West. If things go poorly, output could fall as low
roduct too probably will continue lo decline, althoughlower rale. In the long run. tbe future of Soviet oil production depends on Soviet success In discovering and developing oilfields in newIn the Barents and Kara Seas, the deep waters of the Caspian Sea, Eastern Siberia,eep onshore CaspianInlarge, known reserves of heavy oil. None of these areas have been explored intensively, and any new finds would have liltie impact on oil production until iber. Moreover, the Sovietsmustay to extract the heavj oil that Is not producibk by conventional means.
Development of the olfshore areas and deep onshore basins will require Western equipment and technology. Even so, much of Ihe technology for exploring and developing resources in ihend Kara Seas is not even available in Ihe West, thus complicating and prolonging the ultimate exploitation process.
If the Soviets manage to find and develop large deposits In new areas, the oil production decline could be halted or even temporarily reversed, but probably not before. These judgmentsiscouraging picture of Soviet oil prospects. They rest on our analysis of the USSR's reserve situation and drilling requirements.
Inttdtttrntut Reterret. Recent Western estimates, based on the study of oil basins and major oilfields, place Soviet recoverable reserves at aboutillionalthough we believe them io bethe orderillion barrels. Some of ihe proven reserves will be difficult to develop, however, since tbe majority of large fields discovered in recent years have been heavy, even "non flowing" oil.
Reserves are being depleted rapidly in all major producing regions while the discovery of new reserves is Isgiing. The Soviets have repeatedly emphasized the need toew oil province comparable to Western Siberia. But no new giant oilfield has been discoveredargeareas of ihe USSR may contain substantial oil and gas, but they are remote and ihei: potential is unknown.
Reserves of contentions! oil in areas lhal are currently prod jcing are inadequate lo support the present level of productionhe major structures have already been found, and remaining oil lies in smaller, deeper, highly pressured, and difficult-to-detectThe USSR ha* allowed exploratory drilling, especially wildcattlng. to lag. Moreover, given the
USSR: Oil Production Trends and Projections
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n geophysical and drillingrapid development of new reserves in oil regions will he very difficult.
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With tbe growing role of heavy oileed to boost recovery rites In older fields, enhanced recovery techniques become more Important. Enhancedryan average of. leuercent of total9 Soviel press report indicated thatercent of the necessaryfor enhanced recovery *aa available and existing equipment was not working well. Enhanced recovery method! are not likely to help much inecause they are expensive, have long lead limes, ind involve substantial imports of Weatern technology.
Drilllmg Rffmlrtmtntt. In trying torop in oil production, the Soviets have raised drilling targets and have emphasized the development cf West Siberianonly hope for stabilizing production in the. The increased drilling needs are largely explained by the accelerating deplei.cn of fields in older regions and by the declining productivity of newe "rilling goali, which call for the Petroleum Ministry to drillillion meters inmillion meters morear lhan inout of reach; the So- ieti'*nshort of (hi* target thus far., Sovie: oilmen aay that drilling will hive to be twiceotalillion meters) just to maintain production al0 level.
CesnWntial
Confidential
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Almost tile planned drilling increases areor West Siberia, but even tbere drilling targets are not being met. Part of the problem Is that oil production has nw ahead nf tbe Installation of the Infrastructure necessary to support the oil and gai industries. In mid*
f theew fields that were developed after6 in the more remote areas, none had roads and only iwo bad electric power connections. West Siberian construction organizations do not have the capacity to handle increasing demands. The inadequate road-building program, for example,endangers the entire drilling plan. Demands on transportation cannot keep pace with West Siberian
. development. Drilling iloneon of freight
i pe; meter drilled. Demands on the railroads are especially heavy in tie winterince few all-
| weatherre available, much of the equipment iust be delivered to the remote oilfields when the surface Is frozen.
In older oil-producing areas such as Ihe Volta-Urals and Azerbaydzhan, considerable effort is requiredto minimire declines in production. Extensive in-f'Il drilling, constniction of oilfield facilities, and use of electric centrifugal submersible pumps will be necessary. Since drillers, equipment, and skilledworkers arc being diverted from older regions to work 'n Western Siberia, production declines in the Volga-Urals and elsewhere could be steeper than the Ioviets anticipate.
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j Fuel Substitution Not Um Answer ising production of natural gai and coal,ase are not fully substltutable for oil, will only partially offset the decline in oil output,
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i Natural Cos. Although gaa reserves are large and yearly output goals were surpasseduture slowdown Is likely. All growth In production must come from Ihe permafrost regions ofthc northern part of West Siberia. The cost and physical difficulty of developing deposits there and piping the gas thousands of kj'ometsrsunprecedented problems. Lack of infrastructure, harsh Arctic conditions, and dependence on Western srpplk* of Urge-diameter pipe compressors and valves are likely to hinder exploration. Production from Ihc country's oihcr major gasfieldaha Ukraine, Northern Caucasus,Central Asia peaked6 and has begun to decline.
eanwhile, coal production hatuge disappointment as targets have been underfill filledide margin. The Five -Year Plan's original goal0illion tons is unlikely to be reacbed, ever,oal production fell9 andillionercent above6 level. New mire opacity has been .lo* coming on stream while mine depletion has been rising, especially in older basins in theSSR. New coal basins are located in Siberia. 'ar from major consuming centers, and much of the coal Isin jeat value, bard to ship, or not adaptable for use in existing Soviet boilers.
Nuclear Fewer. Although Moscowigh priority to nuclear energy its role in energy output will be minore coming decade. Installed nuclear capacity is now0 megawattsutput of nuclear-generaled electricity was aboutillion kilowatt-hours9 and accounted for lessercent of primary energy output. Projections, which have been scaled down by the Soviets in recent years, now call0n capacitykulhsn4pcrceitiofall energy)Wlmost all of thiso be developed in tbe European USSR.
Leaders.hip Reactions to the Energy Problem Soviet leaders have been awore of growing energy problems since at least thet did Utile about themheir response wns lo boost investment in oil and gai and to step up the drive for energy conservation.
Investment In7 Brezhnev established the fuel-energy sectorleadingeaning that thed priority for tbe investment that would achieve "maximum and rapidithin this sector, emphasis was placed on hydrocarbon (oil, gas and coal) production and the urgent development of the Tyumen' Oblasi in Western Siberia.
The investment originally plannedn primary energy production has been increasedrash basis.8 the Incremrit in investment in oil. gas, and coal nearly doubled and accounted for almost one-half of the Increase In total Industrial Investment.
Brezhnev admitted lo Ihe CentralPlenum lo8 that despite the expenditure ofillion ruble* on conservation measures, "in practical termso lessening of waste and loueT of fueli.
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Practically all of the potential energy savingIn iix leclort1 repretenting elmoatof Soviet oil consumption. The savingsefforts can wring out of the economybecause the efficiency of healgeneration, and rail transportlready high; because the Sovietsto convert lo more energy-efficientbecause of constrainu on the subaUtulkm of<< .
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Conservation in the heit and power sector has been given considerable emphasis, with fuel requirements per unit of electricity output declining tl percent0mproved efficiency *ai achieved largely by upgrading genera ling equipment; almost all obsolete equipment has been replaced. Thc Soviets are world leaders in cogenerating heal and electricity, with moreombined heat aid power plants In operation.
j As for the transport sector, energy consumption per ton-kilometer and passenger-kilometer is much lower in the USSR than In Western Luropc or lhe United Slates. The USSR uses only one-fourth as Much energy per pauenger-kilonctcr as lhe United States and only aboul two-thirds at much per ton-kilometer of freight Thus, wc see link opportunity for idditional savings in Soviet transport. ll
Industrial energy savings will be slow in comlrj.the second largest oil-consuming industrialthe Soviets intend io make this theireffort. Nonetheless,substantialof heavy, oil-consuming machinery inother industries takes ii
Some oil conservation can be achieved by the lutwillu-lion of oilier fuels, principally natural gas. Aproportion of Soviet beat and power plants
lectricity and htsi lanrrallon, Iron and UmIlhe raatdf atwI-cMMitmwl aeciof.trantport. and
1
Centldentlal
already swiich from oil lo gaseasonal basis, and increased gas supplies to Ihii sector would reduce oil consume*ion. However,ercent of Soviet oil is consumed in Internal combustion engines, andcale conversion can only come very slowly,e also limitations lo the near term in the degree to which coal and nuclear power are practical substitutes for oil in generating heat and power. Major coal mines arc distant from consumption centers, and the declining beat vahe of mined coal (downercent inears) is offsetting tbe increase in volume. Nuclear poweronstrained by long leadtimcs incapucity.
Real growth In grow national product has been falling in tbe USSR and Is expected to drop further in. Meanwhile, energy consumption in the USSR has traditionally risen about as fast as GNP, primarily because of the empbisia given io expanding energy-Intensive heavy Induriry. This has occurred despite (I) the rapid shift in the USSR away from coal and toward the use of oil and gas, which burn more efficiently lhan coal,assive investment in cogen era lion and the electrification of railways,lhat also improved energy efficiency.ontrast. Ihc energy iniensiveneu of output in industrialeconomies has declined markedlyince the Soviets probably cannot ihifl industrial priorities sufficiently in ihc next six years loefTect measurable energy savings, we projeci energy requirements io continue to grow about as fait as GNP.
Fjwrgyowstralntowih
D'iring the early andnergy supplies will be critical for economic growth. During (he last two decades, ihe Soviet energy ripply base expanded much filler than the growth in internal demand.onsequence, thc USSR isajor energy exporter with present net energy expo-Is ofn equivalent Oil accounts for three-fourths of this figure. Shifta now underwiy in th< underlying supplythe expected drop Inundamental change in this relationship. If oil produciion fallsy logs, the growth of total energy production will slow greatly, from an average ofilearercent)
4
Conndinllal
o tn average ofil equivalent per yearleuercent per year).
Onit of our growth project ions for theand capital nock In the USSRNP could grow byercent per year,were no energy constraint. But GNP growthrate would ahn require in increase inconsumptionear. InCommunist countries now receivef Soviethave to have at lean this much Inoff economic! * i
To meet both domestic requirements and exports to Eastern Europe, lhe USSR would have to Importf energyw Westet basislfencrgy for hard currency. Practically all of the energyould have to be in the form of oil. Moscow clearly could not afford to buy oil onillion worth of Imports5 at the oil prices prevailing iairst of all. tbe ihiflet import position would deprive the USSR of its major source of hard currency-he Soviel Union soldf oil to the West for aboutillion, aboul half nf lu hard currency receipts from merchandise exports. Moreover, even under optimistic assumption* concerning Soviet hard currency export earnings, the oil bill would greatly exceed Soviet Import capacity of an estimatedillionrices) Oil imports this large would obviously exhaust Soviet hard currencyIncreases in oil prion relative to other commodity prices, which arc almost certain to occurimply would curtail Soviet Import capacity even further.
The Soviet energy shortfall would thus have to be absorbedombination of slower economic growth andin fuels trade. The exact mi* oftbe domestic Soviet economy and Inunpredictable. Illustrative projectionsa reasonable combination of policy shifts In severalfuel substitution, manpower, and fcsrd currency trade but maintaining Soviet oil eaporta to Eastern Europe ahow Soviet economic growth falling fromercent1 lo Utile
morecroen'ncluded in these estimatesrojected shift in Soviet oil trade with lhea current surplus ofeficit5 ofubstantially higher oil imports would not be affordable if Imports of grain and capital goods are to be maintained even at minimal levels. Nonetheless, imports of Western machinery would declineia tbe face of slowly cxpand'ng import capacity and brightened competition from other uses of Soviet hard currency earning*.
Tbe Impact of oil sbonage* on the Soviet dornestic economy is actatter of reduced economic growth. Soviet leaders are probably well aware that the muchincrementational output available annually iaould not sustain thc increase*nvestment and consumer goods and service* that ine USSR would need each year to sustain reasonable economic growth and maintain an acceptable level of consumption.
If there is no reduction in the growih of resources allocated to defense andthe lat;cr would have to be maintained to keep future output increments from falling evenand thus living standards would fall. Maintaining the aamc share*uch smaller GNP pie would not be much better. Coniumption would still fall by the. This couldrofound impact on labor productivity while increasing tensions within theand the population.
EuttraEareae
Eastern Europe Imports about or? 'ourth of iu energyption. About three-fourths t* the imported energy comes from the>'nderercent, if Romania Is exduded. The Soviet energy crunch and splraling OPEC price* have forced Eastern Europe to reevaluate long-established pa'.tcrn* of bothand production.
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f nuty Strmieties. Afteroean of increaiing reliance on oil and gas, moat Eas; European countries are again emphasizing cual production *nd areon more nuclear power capadty. Bui with the exception of Poland, which has large hard coal
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the long-term prospects in poor forcirum ion of coal production. Tbe real of lhe region must rely oa increasingly poorer qualily brown coalniic. Most of tbe East European countries have ambitious plans calling for nuclear power to supply fromoercent of tbeir energy needs by ihe turn of the century, but for the neat decade, only Bulgaria will have significant nuclear power capacity forn needs. Romania, Ihe only East European country with gas and cil reserves, is also facing energy problerns. Its oil and gas reserves are being depleted, and production for tbe coming decade will fell
anure: Sotactor, Current energy conservation programs In Eastern Europe on the whole have been markedeliance upon administrative measuresn unwillingness to clamp down on der.iand iand agriculture. (Only Poland hr* introduced semehe measures adopted have affected most households and government offices, but these sectors account for onlyoercent of energy use.
Restructuring national output, that ia, changing pro-auction and growth priorities to leu energy-Intensive goods and services, run: counter to traditionalgrowtheory and, even if politically feasible, requires long It sdtlmcs. Aged, obsolescent machinery andp an inordinate amount of fuel, but hard currency constraints limit Ihe ability of all East European nations to import advanced, more efficient equipment. Finally, increasing reliance on generally abundant dornestic coal and lignite reserves, as other more efficient energy sources become acarcer and more expensive, constrain possibilities for reducing energy use per unit of output.
Prospects foe Imports. Soviet energy exports toEurope will expand little, if at all, In. Total energy exports are expected to remain al about0 levelil equivalent, and oil exports. With Soviet oil deliveries leveling offastern Europe will be forced to tum Increasingly to non-Communist sources.Europe now Importsf non-Soviet crudebyfrom OPEC. Slack Western demand. Western tradend uncompetitiveneu of East EuropeanWestern market* hinder Eastern Europe's
ability to earn the hard currency nee-Jed to increase oilt tbe same time, relatively high debt service and tightening condition* la international money market* cloud tbe prospect* for large-seal'1 future borrowing. '
la tbe past. Eastern Europe has reliedreat extent oo barter agreements to pay for Middle Eastern oil. Tbe East Europeans, aa well as the Soviets, realize that (bey must Intensify their efforts to obtain oil al concessionary price* from the oil-producing leucountries througK arms sales, barter deals, and development assistance.8 this objective was explicitly formulated in the energy program oi the Council for Mutual Economic Assistance (CEMA).
However, the proa peels for concessionary deals appearoor. Andegotiations with Middle Eastern governments, CEMA members got much leu oil, even for hard currency,hey hoped to get. At best, CEMA member* face great difficulties and uncertainties in obtaining any substantial increase in oil deliveries through covernment-to-government dealsPEC countries, while prospects for large purchases from tbe multinationals are even dimmer.
Imtrnet of Energy Shortage oa Growth. Tht East European energywiih ilow growth in the working-age population, sluggishimited raw material base, and overcentralired and clumsy planning anda rather dismal economic decade for Eastern Europe. We estimate that ba'ance-of-payments constraints will limit East Europeanof oil tonwhat tbey now buy for bardwould be valued at0 prices. Economic gr th,onsequence, will slow even furtherM tlx year* toercent per year compared with an annual averageercent.
Poiitlcal Aspecn
Soviet leader* and specialists arc fully aware thai the USSR inace* serious energy problems. Available evteknee suggests thai Soviet production official* think thai oil output ha* just about peaked and will decline if urgent measure* (including acquisition of Western technology) are not1 Is not clear.
CoflfldenlUI
however, how long tbey think peak production caneld or whether they agree with our forecast.be top political leadership may believeant drop la oil production can be avoided during, they probably havo been told thatistinct poasiWHtyi
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We doubt, however, that the mounting energyofve shaken the confidence of tbe Soviet leadership and bureaucracy in the very long-term energy prospects of Ibe USSR. They are counting on the huge proven coal and natural gas reserves of the country aod art hopeful that large new reserves of oil will be discovered. ..
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They arc accelerating their nuclear power program, and they express confidence in the future ofeactors. This vast potential energy base, they believe, gives theundamental strategic advantage in ibe evolving world balance of power. The "energys they see it, isatter of transportation, steeply rising fuel extraction costs,echnologicalwhich tbey believe can and will be overcomeecade or two, with or, if necessary without Western assistance. .
As oil production falters. Soviet decisions on howoil among competingexports to the non-Communist world,to Communistbecomehard and painful. Presumably, the needrop in GNP growth domestically andagainst political instability in Easternexports to the West the most expendable I i
The most difficult and critical choice probably willdomestic consumption and exports toAs noted earlier, we expect theo tryeneriry deliveries to its Warsaw Pact0 level and to continue to offer muchenergy shipped on at leasto steeply reduce oiltotal energyaccentuatedecline in Eastern Europe'sby aggravating energy shortages and/orEastern Europe to turn to higher cost energy.;
Toe slower economic growth is in Eastern Europe, the greater the likelihood of political instability there, particularly ilnce the share of output devoted to domestic uses is already on tbe decline because of the need to reduce balance-of-paymenti deficits. Kow to divide output domesticallyilemma fo, East European regimes: tbe more produtt'on devoted to investment, the worse off consumers are ir. the present; the more production devoted to consumption, the slower future economic growth is likely to be.
The prospect of stagnating living standards in Eastern Europe is doubtless disquieting to Moscow.in material well-being In Eastern Europe would increase public resentment toward the Soviet Union and would cause more intense factionalism within East European leadership groups, j
It is quite possible that the Soviets have miscalculated (a) their own capacity to supply oil to Eastern Europe, and (b) the East European capacity to acquire oil from OPEC countries, substitute coal for oil, or reduce economic growth and consumption without provoking unrest. The Soviet attitude, how-ever, seems to be that the East Europeans are going to have to pull in their belts just like the Soviet population. While disturbances in Eastern Europe would be highly undesirable, the USSR would not be prepared to pay any price to avoid the use of military force, even against Poland.
Given the possibilities of alarmingly low GNP growth in the USSR and conceivable economic and political disorder in Eastern Europe, the Soviets may consider pursuit of an aggressive policy in the Middle East. Certainly they are aware that access to Iran's oil supply would help alleviate the economic problem* facing them and their allies in the mid- and late-l
The Soviets will be seeking means to ensure the flow of energy in the next decadeupport their own economy and those of Eastern Europe, and the outlook is not encouraging. The spiraitng oil cost will motivate the USSR to seek oil at concessionary prices through arms sales, barter deals, andistancc as sugpested above. Most OPEC countries appear disin-
(.'onfl^nllal
Wrested in this type of flrranaement. and the Soviets certainly must hope forleftist. pro-Sovietin Iran which would bo receptive to this type of arm Dgement. Certainly their primary objective la Iran is to schieve precisely this type of government.
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The Sovicu might, in desperation, undertake amilitary thrust into Iran, designed primarily to occupy the Khuzestan oilfields. WhOe such an action is not beyond the realm of possibility, it presents tbe Soviets with enormous difficulties. They must first of all take Into account US statements with respect tovital interest" In the Persian Gulf and the West's continued reliance on Iranian oil. Tbey would be aware that they wereery high risk of direct military confrontation with the United Slates; they know that Iraq has claims to Khuzestan and would view such actionajor threat to itself; and they would have to weigh the broader and very grave international repercussions of such aggression.
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They would ciso have to recognize tbe difficultyoccupying Iran and tbe prospectto protect the valuable oilfields againstguerrilla insurgency. It seems unlike ly thatwould seize Khuzestan ia the Dear termwere "invited" to inlcrveccewthat enjoyed at least some degree ofrecoanitkxa.; ! ^ "
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Original document.
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