About the power of oil

From Thomas L. Friedman’s book Hot, Flat and Crowded

“I believe that the best post-Iraq strategy for driving reform in the Persian Gulf is to bring down the global price of oil – by developing clean power alternatives – and then to count on the forces of globalization from outside, and economic pressures inside, to push the leaders of these countries to change.  That’s the combination of forces that stoked the reform process in Bahrain.  If the price of oil were half of what it is today, these regimes would not be able to resist political and religious modernization so easily.  As the Johns Hopkins University foreigh policy expert Michael Mandelbaum observes:”People don’t change when we tell them they should.  They change withn they tell themselves they must.”  Falling oil prices would make them tell themselves they must.

We know from history that this can work.  Consider the Soviet Union In February 2007, I went to Moscow to give a lecture at the U.S. embassy on the subject of globalization and energy politics.  Afterward, I was chatting with Vladimir Mau, the director of Russia’s Academy of National Economy.  I asked hi if he thought that I was correct in arguing that it was $10-a-barrel oil, not Rnald Reagan, that brought down the Soviet regime.  (actually the oil price on Christmas Day 1991, when the Soviet Union collapsed, was $17.)

Professor Mau did not hesitate.  He shook his head.  No, he told me, I was wrong.  It wsa $70-a-barrel oil followed by $10-a-barrel oil that killed the Soviet Union.  It was, he explained, the sharp rise in oil prices in the 1970’s, due to the Arab oil embargo and the Iranian revolution, that deluded the Kremlin into propping up inefficient industries by overextending economic subsidies at home, into postpoining real economic reforms, and into invading Afghanistan abroad-and then it wsa the collapse of the prices in the 1980’s and 1990’s that brought down the overextended, petrified empire.

Here’s the exact story:  The inefficient Soviet economy survived in its early decades, Professor Mau explained, thanks to cheap agriculture, grown by peasants forced into collective farms, and cheap prison labor, used to erect state industries.  Beginning in the 1960’s however, even these cheap inputs weren’t enough, and the Kremlin had to start importing, rather than exporting grain.  Things could have come unstuck then for the Communists.  But the 1973-74 Arab oil embargo and the sharp upsurge in oil prices-Russia was the worlds second-largest producer after Saudi Arabia- gave the Soviet Union a fifteen year lease on life from a third source of cheap resources:”oil and gasa,” Professor Mau said.  The oil winfall gave the Brezhnev government “money to buy the support of the different intersst groups, like the agrarians, import some goods, and buy off the military-industrial complex,” Professor Mau said.  “The share of oil in total exports went from 10 to 15 percent to 40 percent.”  This made the Soviet Union only more sclerotic.  “The more oil you have, the less policy you need,” he noted.

In the 1970’s, Russia exported oil and gas and “used this money ot import food, consumer goods, and machines for extracting oil and gas,” Professor Mau said.  The Soviet state extended itself and its subsidies into more and more areas, based almost entirely on oil revenues, not real manufacturing or agricultural productivity gains or tax revenues.  By the early 1980’s, though, global oil prices ha dstarted to sink-thanks in part to conservation efforts by the U.S. “Oone alternative for the Soviets was to decrease consumption [of other goods], but the Kremlin couldn’t do that-it had been buying off all these constituencies,” Professor Mau explained.  So the Kremlin “started borrowing from abroad, using the money mostly for consumption and subsidies, to maintain popularity and stability.”  Oil prices and production kept falling as the Soviet remier Mikhail Gorbacheve tried reforming Communism, but by then it was too late.”

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