Policy Sciences 6 (1975), pp. 41-48

9 Elsevier Scientific Publishing Company, Amsterdam--Printed in Scotland

The Soviet Union, The Middle East, and the Evolving World Energy Situation* A R N O L D L. H O R E L I C K Social Science Department, The Rand Corporation, Santa Monica, California

ABSTRACT Surveying and summarizing the basic issues corffronting Soviet decisionmakers in the next ten years as reflected in energy and international political terms, this analysis treats the capacity and constraints mediating Soviet influence in the resolution of the future world energy balance. A scenario highlighting a "Soviet-Preferred Future World" is developed that focuses on three classes of likely energy outcomes: (I) a gradual erosion of the Western commercial position in Middle East oil, (2) repeated shortages in oil-consumer states leading to a diversion of attention away from international matters and increased preoccupation with "domestic" energy woes, and (3) a deterioration of the terms of trade for energy importers vis g~vis Soviet and noneommunist trading partners. The discussion concludes with an assessment of several of the key choices confronting the major oil-importing nations and requiring resolution.

A s a g l o b a l s u p e r p o w e r , the Soviet U n i o n c a n n o t fail b u t to have a s t r o n g interest in a n y issue with ramifications as deep a n d f a r - r e a c h i n g as the w o r l d energy situation. T h e U S S R ' s p r o x i m i t y to a n d h e a v y i n v o l v e m e n t in the M i d d l e East, the vortex o f w o r l d oil concerns, o n l y sharpens t h a t interest. Even before A r a b oil p r o d u c e r s u n l e a s h e d the " o i l w e a p o n " in O c t o b e r 1973, expectations a b o u t the future course o f i n t e r n a t i o n a l oil t r a n s a c t i o n s h a d a l r e a d y b e g u n significantly to influence the foreign a n d d o m e s t i c policies o f a large n u m b e r o f w o r l d a c t o r s with w h o m Soviet foreign p o l i c y is d e e p l y engaged. But while the Soviet U n i o n is the w o r l d ' s second largest p r o d u c e r a n d c o n s u m e r o f liquid fuels, its interest in the w o r l d energy balance a n d in M i d d l e E a s t oil is n o t n o w as direct o r i m m e d i a t e as t h a t o f the o t h e r large p r o d u c e r s a n d consumers. F o r the Soviet U n i o n is the o n l y m a j o r i n d u s t r i a l p o w e r n o w entirely self-sufficient in energy resources. I f U.S. d e p e n d e n c y o n M i d d l e E a s t oil i m p o r t s in *Revised version of a paper prepared for a Conference on Choices for Europe and America: The Middle East and the Energy Situation, 1973-85, sponsored by The Ditchley Foundation, The International Institute for Strategic Studies, The Middle East Institute, and the World Peace Foundation, June 15-17, 1973, Ditchley Park, England. 41

the years ahead should reach the levels now widely predicted, the Soviet Union will soon be the only major industrial power whose domestic energy supplies are not critically dependent on the Middle East.

The Soviet Oil Position What, in brief, can be said with reasonable confidence about the present and nearfuture Soviet oil position ?1 1. The growth rate of Soviet crude oil production, while still impressive, has been declining steadily since the mid-1950s from an average of 16 ~ per year in 1956-60 to a 7 ~ annual average planned for 1971-75. (Actual growth from 1971-73 was at the rate of 6.7 700per year.) 2. Nevertheless, the production growth rate until recently was adequate to sustain a more rapidly growing rate of oil and petroleum exports (approximately one-fourth of total production in 1971, divided roughly equally between Communist and nonCommunist markets). In 1972, however, exports rose only marginally and the increase was more than offset by a rise in imports, yielding a slight decline in net exports; growth in net exports resumed in 1973, but evidently at a lower rate than the growth in output. 3. If met, the 1975 target of 496 M T is probably adequate to cover projected large increases in crude oil exports to CEMA (Soviet Bloc) countries and also at least to maintain roughly the current level of hard currency-earning exports to the West. (Crude oil is the Soviet Union's largest single hard currency earner.) Soviet imports of oil, while growing, are still comparatively small, and are unlikely to have assumed substantial proportions by 1975. 4. By 1980, however, the picture could change significantly. Barring much more rapid development and exploitation of West Siberian oil fields than the Soviet Union seems capable of achieving without extensive foreign assistance, the rate of growth of output will probably continue to decline, perhaps to an annual average of 5 % during 1975-80. Assuming that inland consumption increases at about the same rate in the second half of the decade as in the first, and that CEMA requirements grow as rapidly as is currently projected, Soviet production in 1980 will probably fall short, though not massively, of the requirements of the European Communist-ruled area (to which Cuba, N o r t h Korea and North Vietnam should also be added). If allowance is made for exports to Western Europe and Japan at current levels, the deficit would be substantial, some estimates ranging to a level of 100 M T or more annually. 5. Anticipating the prospect of such a deficit, however, the USSR has made it clear that it will not indefinitely bear the burden of acting as virtually sole provider of oil for its East European allies, which are dependent on the Soviet Union for some 80 % of their oil consumption. While Soviet exports to CEMA countries are scheduled to grow rapidly in the next few years (through 1975 under the current Five Year Plan), even at the cost of curtailed exports to Western Europe and Japan, the socialist countries have 11 have drawn heavily for this appraisal on the work of my colleague, Abraham S. Becket, "Oil and the Persian Gulf in Soviet Policy in the 1970s," in M. Confino and S. Shamir, eds., The USSR and the Middle East, Israel Universities Press, 1973, pp. 173-214. 42

been put on notice that they will have to find other sources o f oil supplies after 1975; and C E M A countries have begun increasingly to turn to the Middle East to contract for deliveries after that date. Given the obvious political advantages o f preserving some i m p o r t a n t measure o f C E M A oil dependence, as well as the large investments sunk into the Friendship Pipe Line, the Soviet U n i o n will p r o b a b l y wish, however, to maintain some substantial level o f exports to Eastern Europe. TABLE 1 Soviet Domestic Production and Foreign Trade in Oil, 1955-1973 (in millions of metric tons)

1955 1. Domestic Production (inc. gas condensate) Annual rate of increase

2. Imports (crude and oil products) 3. Exports (crude and oil products) 4. Net exports Annual rate of increase

70.8

1960 1965 1970 1971 1972 1973 1975 147.9 242.9

353

377.1 400.4

429~

(plan)

(496)

6.8 % 6.2% 7.1% ~ v. . . . . v - - - - ~ ' 7.0% (planned avg) 6.6 9.1 14-7

4.4

~ ~ 15.9% 10.4% 7.7% (avg) (avg) (avg) 4.4 1.9 4.6

8.0

33.2

64.4

95.8 105.1 107.0 118.3e

3.6

28.8

62.5

91.2

98.5 97.9 103.3 8.0% --0.69/00 5.8%

51.6% 16.7% 7.9% (avg) (avg) (avg) Sources: USSR Foreign Trade Ministry, Kneshniaia torgovlia S S S R : statisticheskff sbornik 1918-1966, Moscow, IMO, 1967, pp. 81 and 103. USSR Central Statistical Administration, Narodnoe Khoziaistvo S S S R , 1922-1972, Moscow, Statistika, 1972, pp. 163, 493-494. USSR Central Statistical Administration, Narodnoe Khoziaistvo S S S R v 1972g, Moscow, Statistika, 1973, pp. 206, 738, and 740. USSR Foreign Trade Ministry, Vneshniaia Torgovlia S S S R za 1973 god: statisticheskff obzor, Moscow, IMO, 1974, pp. 27 and 41. aEkonomicheskaia Gazeta, March 11, 1974, p. 7.

The U S S R ' s basic self-sufficiency does not necessarily mean that the Soviet U n i o n will fail to become a more substantial importer o f Middle Eastern oil in the coming decade. It m a y import in quantity to permit politically useful exports to Soviet allies, to earn hard currency by sales to the West and Japan, or to service Soviet markets remote f r o m the sources o f Soviet petroleum: I f M o s c o w chooses for these purposes to import heavily, its interest in preserving the stability o f the international oil market might grow, but it would require a sea-change in the deeply ingrained Soviet c o m m i t m e n t to autarchy, especially in the vital energy field, for the Soviet U n i o n to risk making itself dependent in a critical degree on external sources o f oil supply, particularly f r o m a 43

region of the world whose instability has been repeatedly and painfully driven home to a succession of Soviet leaders. Recent sharp increases in world oil prices, from which Soviet oil exports to hard currency countries have fully benefitted, may have strengthened the USSR's traditional autarchic impulses in several ways.2 Since the Soviet Union is now earning between three and four times more per barrel of oil sold to the West and Japan than in early 1973, pressures to earn needed hard currency by increasing or at least maintaining the volume of exports to non-Communist countries have presumably been relaxed. Windfall profits from oil exports since 1973, by easing the USSR's hard currency position, have apparently also lessened Soviet interest in securing large-scale foreign participation in the development of Soviet energy resources at the cost of committing a substantial share of future production to exports as repayment for credits. Moreover, the sharply increased price of Middle Eastern oil and the growing reluctance even of "friendly" Arab producers, like Iraq, tO forgo hard currency sales in barter deals with the USSR, will probably reduce still further Soviet willingness to become more heavily dependent on external sources of petroleum supply. But even if, as now seems unlikely, there is a substantial expansion of Soviet foreign trade in oil in the coming decade, the basic self-sufficiency of the USSR in energy resources will provide Soviet leaders with far greater freedom of maneuver and choice than their oil-deficient competitors. The range of policy options open to the Soviet Union will surely be influenced by the extent of its involvement in international oil transactions, but its basic self-sufficiency ensures that its own oil position in the Middle East will not dominate its policy choices. Broader foreign policy considerations, both global and regional, will almost certainly determine Soviet policy choices with respect to future Middle East oil contingencies. A key question for the future is whether the Soviet Union is likely to promote disruption or stability with respect to the flow of oil from the Middle East to energyhungry markets in the West and Far East. It might be useful to start by defining the limits on the Soviet Union's capacity to influence future world oil energy balances.

The Limits of Soviet Influence Barring extremely aggressive Soviet behavior so rash that it would introduce a radical discontinuity in global politics, the Soviet Union cannot independently cause a major disruption in the world energy situation. Theoretically, it could do so either by interdicting the flow of oil from the Middle East to major foreign markets or by seizing (or otherwise securing effective control over) several of the major oil-producing states and "turning off the tap." Both of these alternatives seem highly implausible. Interdiction or seizure would be so provocative that their immediate military and political impact would dwarf in significance even the drastic consequences that such actions would eventually have for the energy positions of the affected states. To exploit "effective control" achieved by means short of direct seizure (supposing even that "effective 2 For a striking piece of supporting evidence from a Soviet source, see the report of the May 27, 1974 interview granted American journalists by the USSR Minister of Oil Production V. Shashin (Washington Post, May 28, 1974, p. 1). 44

control" is possible in today's Middle East without military occupation) would require the Soviet Union to provide Arab states willing to divert oil from Western consumers with alternative markets on a scale that far exceeds the Soviet Bloc's absorptive capacities now and in the indefinite future. Conversely, at the other extreme, even if large-scale Western assistance were to sharply accelerate the rate of growth of Soviet oil production and to bring with it an effusive blossoming of Soviet solicitude for the energy interests of its erstwhile Cold War foes, Soviet production could not conceivably yield surpluses large enough to compensate for substantial curtailments in exports of Middle Eastern oil. Between these extremes of behavior, the projected world energy situation during the coming decade will leave the Soviet Union with ample room for maneuver in which to choose courses of action that could contribute, though not decisively, toWard exacerbating or alleviating the difficulties that are envisaged. Soviet opportunities for promoting either tendency will arise out of the interactions of the producer states, the oil companies, and the major consumers, outcomes that are essentially beyond Soviet control. The USSR's comparativelystrong domestic oil position will leave it relatively freer than other major states to choose politically expedient postures with respect to the situation that emerges, but the Soviet Union cannot substantially influence the broad contours of that situation. The posture which Soviet leaders elect will depend in turn on the Soviet Union's broad foreign policy priorities, both globally and in the region of the Middle East, and only secondarily on the oil position of the USSR.

A Soviet-Preferred Future World Energy Scenario Assuming that present broad Soviet foreign policy priorities hold more or less constant during the decade ahead, what might be the salient characteristics of a Sovietpreferred world oil situation and how might the USSR act to exploit it ? 1. A continuing gradual erosion of the Western oil companies' position in the Middle East, generating moderate to severe strains on the oil supplies of the major non-Communist consumers; not so crippling as to provoke either desperately violent reactions (military interventions) or dramatic political galvanization of the threatened states behind a common energy policy; nor so costly to producer states as to make their staying power dependent on massive Soviet assistance. 2. Repeated temporary shortages in consumer states, producing intermittent brownouts and blackouts and industrial stoppages, acute generalized anxiety, and a consuming preoccupation with securing reliable sources of supplies (behavior that might be analogous to that of a drug addict barely maintaining his habit) such as to seriously constrain the foreign policy freedom of maneuver of affected states and to divert their energies from productive courses of international action. 3. Adverse changes in the terms of international oil trade for major importers such as to place increasingly heavy strains on their balance of payments, increase Soviet hard currency earnings from exports to industralized non-Communist countries, and raise the incentives of oil deficient developing countries to make politically desirable barter deals for Soviet oil. This would seem to describe the future world oil scenario most agreeable to the 45

Soviet Union. In these circumstances, the "oil weapon" in the hands of Arab producers would continue to be a potent political tool, and to the extent it was wielded for purposes that suited Soviet foreign policy goals, as in October 1973, the USSR would continue to encourage and support its employment. While there are few Sovietfavored political objectives, apart from Arab-Israel conflict issues, for which Arab producers are likely again to unleash the "oil weapon," tension between producers and consumers that would inevitably attend any future use of the "oil weapon," regardless of the immediate Arab political objective, would almost certainly be welcomed in Moscow on general principle. But even more attractive from the Soviet point of view would be the extraordinarily favorable prospects for destroying the fabric of the Western alliance system generated by a desperate dog-eats-dog competition for scarce oil supplies among the erstwhile allies, and especially between the EEC countries and Japan, on one hand, and the United States, on the other. While the Soviet Union, as in 1973-74, would almost certainly support any future restrictive or discriminatory oil policies by the producer states directed against major non-Communist consumers, so long as the Soviet leaders wished to preserve the atmosphere of East-West d6tente, they would probably seek to avoid appearing as the chief instigators or promoters of such policies.3 In any case, conspicuous Soviet instigation or promotion would be superfluous, for if producer states were willing to accept the considerable risks that such policies would entail, they would do so only because such policies in the first instance served their own interests. The Soviet Union could enjoy the bonus, without bearing the onus. In the years ahead, Moscow will doubtless continue to approve producer country demands for such measures as equity participation in existing concessions, and to support their right to nationalize oil fields and to create national oil companies, but it will follow rather than lead the pack and will probably refrain from explicit inflammatory calls to initiate new boycotts of Western and Japanese markets. I f the major Middle East actors in a future energy crisis were states in which Soviet political influence was not dominant or particularly strong (as would almost certainly be the case), such a posture would be all the more appropriate to the generally d6tente-oriented East-West foreign policy currently being pursued by the Soviet Union. Indeed, the Soviet Union might even express sympathy over the plight of desperate consumers abroad ("unfortunate heirs to the bitter legacy o f colonial exploitation by previous imperialist regimes") and might choose, if Soviet 3 Between October 1973, when the Arab producer production cutback and selective embargo were initiated, and April 1974, when these measures were provisionally lifted, Soviet propaganda pursued a dual line, one aimed at Arab audiences and the other at the West, particularly in radio broadcasts, where differential beaming is possible. Thus, Soviet broadcasts to the Middle East and North Africa applauded and endorsed the Arabs' use of oil sanctions, praised their effectivenessin gaining support for the Arab position against Israel and in isolating Jerusalem diplomatically, as well as in inducing West European countries and Japan to bypass the "middleman" international oil companies and enter into direct contacts with oil producing countries ("Themes on Middle East Oil in Soviet Propaganda to the Arabs," U.S. Information Agency, Research Memorandum, M-6-74, March 11, 1974). In the spring of 1974, Soviet broadcasts also sided with "progressive" forces in the Arab world that opposed lifting of the restrictions. At the same time, however, the Soviet national press, responding to Western allegations of Soviet instigation, strongly denied Moscow's complicity and attacked Western critics for placing the blame "at the wrong door." (The New York Times, December 6, 1973.) 46

supplies permitted, to dole out rations o f temporary relief, on a selective and limited basis, in exchange for political and economic favors.4 The Soviet U n i o n ' s o w n oil position might influence its capacity to exercise leverage in these circumstances. Whether the Soviet u n i o n will have available in~ t h e years ahead sufficient excess resources to reward oil-starved consumers it wishes to w o o or wean away f r o m allies will depend chiefly on two considerations: its success between n o w and then in increasing presently lagging rates o f Soviet oil production (i.e., the rate a t which West Siberian oil fields can be developed and exploited) 5 and the extent to which the C E M A countries n o w so heavily dependent on Soviet oil imports will have m a n a g e d to secure reliable supply arrangements elsewhere (i.e., in the Middle East). Should disruption o f oil flow f r o m the Middle East be so generalized as to imperil East E u r o p e a n as well as n o n - C o m m u n i s t consumers, the Soviet U n i o n would have to give first priority to its allies; but this is an extremely unlikely contingency. Punitive or discriminatory curtailments o f supplies by p r o d u c e r states would be directed in the first instance at the advanced industrial states o f the West which can be squeezed for real profit; and if Middle Eastern oil curtailment measures were inspired primarily by regional political considerations (e.g., the A r a b - I s r a e l conflict), the proA r a b stance o f the C o m m u n i s t world would ensure the i m m u n i t y o f East E u r o p e a n importers. To the extent that the Soviet U n i o n was able to dole out supplies to energy-hungry customers, it would wield a powerful foreign policy instrument for exacerbating divisions within the consumer camp. States that were participating in the development and exploitation o f Soviet energy resources would probably be the prime beneficiaries; M o s c o w would reward their foresight in signing on with the U S S R before the energy d r o u g h t ; for others w h o had held back, this might serve as a useful object lesson.6 I f the scramble for scarce oil supplies had widened cleavages between the E u r o p e a n allies and the United States, support for potential schismatics might seem especially attractive. J a p a n might present itself as a particularly tempting target in such a game, which could serve Soviet interests with respect b o t h to China and the United States. While this perhaps describes a future world energy situation highly advantageous to the Soviet Union, the U S S R ' s capacity to benefit f r o m it is not matched by her ability to bring it about. In this regard, Soviet oil, military power, and political adroitness are less relevant than the success or failure o f the m a j o r a c t o r s - - p r o d u c e r countries, 4 During the 1973-74 crisis, Soviet spokesmen reassured anxious Western customers about the stability of Soviet contracts to deliver oil, and simultaneously emphasized to Arab audiences that the volume of Soviet oil exports to non-Communist countries was too small to make any significant difference. 5 Dependent, in turn, on the pace and scope of foreign assistance. 6 Alternatively, Western states that had become significant importers of Soviet oil and gas in consequence of their participation in the development of Soviet energy resources, might find themselves under conditions of an international oil squeeze peculiarly vulnerable to Soviet manipulation of exports, or at least to the threat of such mardpulation. Blatant and provocative curtailment of scheduled Soviet deliveries, say, to the United States, of liquified natural gas produced with American development assistance, would probably strain the limits of ongoing "d~tente" postulated in this paper, but delays and intermittent small reductions would probably not. In the face of a generalized international oil crisis, the Soviet Union might plead that energy exports had to be reduced to meet urgent domestic and allied needs. 47

Western oil companies, and consumers--to resolve divergencies and conflicts in the oil market of the future; and perhaps, most crucial of all, the success or failure of the United States, the countries of Western Europe, and Japan in forging a common energy policy aimed at warding off an acute energy crisis or dealing with one in a manner that limited the capacity of mischief-bent producers to tear them apart and of the USSR to pick up the pieces.

48