Can Oil Prices Topple Empires?

It is rarely a good sign when oil prices reach the headlines. In the aftermath of the February 28th US-Israeli missile strikes on Iran, the Islamic Republic has effectively blocked the Strait of Hormuz, a critical choke point of the global oil trade. This has caused prices to soar in what the Associated Press refers to as a “nightmare scenario”.^[1]

It is hard to not see parallels to the oil shocks of the 1970s, crises that still evoke images of empty freeways, energy saving campaigns and above all economic anxiety across much of Europe and the United States. However, much as this period deserves attention against the light of current geopolitical events, we should avoid overlooking a less well-known, but nonetheless highly consequential oil crisis of the late 1980s, termed the “Counter-Shock” by energy historians.^[2] While often forgotten in more Western-centric accounts of this period, the Counter-Shock was hugely impactful across the Eastern Bloc, with some historians going as far as linking it to the failure of Gorbachev’s economic reforms and the collapse of the Soviet Union.^[3]

So then, what was this Counter-Shock, why do many blame it for the collapse of the USSR, and did modern Russia draw the right lessons from it? Let us get to the core of this.

In 1986, Saudi Arabia began dramatically ramping up its oil production. As a member of OPEC, an international organization consisting of oil-exporting countries aiming to coordinate on the international petroleum trade, the Kingdom had previously attempted to keep prices high by limiting production. However, after years of frustration with this strategy, the Saudis changed course, drastically increasing extraction and shocking international markets with abundant high-quality oil. For Saudi Arabia, this led to significant gains in revenue. For the Soviet Union, however, this shift in policy was an unmitigated disaster.^[4]

At the start of the 1970s, the Soviet Union, previously skeptical of international trade, began drastically increasing its energy exports.^[5] With Siberia in particular being home to rich oil and gas reserves, the 1970s saw an enormous influx of money into the USSR as foreign governments began increasingly importing Soviet energy resources. The oil crises during this same period, traumatic as they were in the West, thus proved wildly lucrative to the Kremlin. Among Soviet leadership, this economic opening was therefore viewed as a clear success, at minimal cost. Yet a decade later, the USSR’s growing dependence on oil exports would reveal itself as coming with unexpected vulnerabilities: Not being an OPEC member, the USSR was largely at the mercy of international oil prices, with limited avenues for coordination and influence. For Soviet Premier Nikolai Gorbachev, the 1986 oil price collapse came at the worst possible time: In the middle of a long-overdue attempt at reforming their struggling economy, the Kremlin had planned on softening the pain of economic transformation with programs financed by oil revenues.^[6] The Counter-Shock thus struck the Soviet Union at a crucial juncture, irreparably damaging its economy in what would turn out to be its final years.

So far the common telling of this story. Some would go further, with American conservatives and Russian nationalists alike framing it as a deliberate US-Saudi conspiracy to sabotage and eventually bring about the fall of the Soviet Union.^[7] In a way, the Counter-Shock appears almost as a sort of higher power, with the Soviet economy taking the role of a passive victim of forces beyond its control.

However, further investigations reveal a more nuanced picture. After all, it does seem somewhat difficult to believe that the largest global oil producer at the time^[8] would be unprepared for market disruptions, especially after witnessing the crises of the 1970s. Why was the Soviet Union so sensitive to disruptions in the global oil market?

For one, the Soviet oil economy was already seeing structural challenges by the 1980s, with production suffering from both general economic stagnation and lagging technological innovation. The 1986 Counter-Shock was not the only oil crisis that the USSR experienced during the decade, with a final collapse of Soviet domestic oil production occurring from 1988 to the political end of the Soviet Union in 1992.^[9] In addition to these structural economic issues, recent examinations of now-declassified internal Soviet correspondence paint a damning picture of the Soviet elite, with mismanagement, recklessness and ignorance present across large parts of the Soviet apparatus. Since opening the energy economy had been canonized as an unquestionable success, those calling attention to associated risks quickly found themselves dangerously far from the party line. The ability of Soviet administrators to adequately prepare for potential oil shocks was further limited by widespread ideological skepticism of long-term trade forecasting. Marxist-Leninist theory conceived of capitalism as inherently unpredictable and chaotic.^[10] Scientific forecasting in general was controversial within the Soviet system, with scholars that advocated for more sophisticated tools of economic forecasting facing repression and marginalization for much of Soviet history.^[11] Therefore, forecasting long-term developments in trade with non-Socialist economies was discouraged within the Soviet system, and few attempts were made to prepare for and anticipate these long-term shifts. This background aligns with documents that show Soviet planners as primarily focused on small-scale case-to-case specifics rather than large systemic challenges, often missing clear indicators of impending economic disaster.^[12]

There is thus more to this story than economic forces beyond the USSR’s control. However, rather than merely pointing towards bad decision-making on the part of individual Soviet administrators, the sheer breadth of the problems outlined so far indicate significant issues with the institutions of the Soviet state itself. The importance of good institutions has been repeatedly argued for by several economic historians, chief among them Daron Acemoglu and James Robinson.^[13] Under this lens of analysis, long-term economic growth and political stability rely on institutions that distribute political and economic power across a broad range of actors. Institutions that grant power to a small elite, on the other hand, encourage corruption, inequality and stagnation.^[14] This lens of analysis is not uncontroversial, with other scholars critiquing it as insufficiently taking into account factors such as culture.^[15] Indeed, these institutionally-focused explanations of growth and development can ring somewhat hollow during a time in which China, with its highly authoritarian institutions, continues to see economic growth well above that of most liberal democracies. However, it would provide a persuasive explanation for the observed structural flaws in Soviet decision-making: Rather than distribute economic power across a wide range of actors, the USSR concentrated economic and political power in the hands of a small elite with questionable political incentives, operating on dubious ideological premises. This institutional setup likely played a significant role in shaping a system that was particularly poorly suited to providing both the innovation and flexibility needed to weather challenges such as the Counter-Shock.

Unfortunately, it does not appear as if the current Russian elite has learned from these mistakes, Russian president Vladimir Putin least of all. Russian political and economic power remains concentrated in the hands of the oligarchic few, with little indicating a serious willingness for reform. If history is anything to go by, Russia may therefore be in a more vulnerable position than it appears. While oil prices on their own may thus not topple empires, institutions can greatly affect the degree to which these empires can accurately assess, prepare for and respond to crises.

Author: Elias Gerndt-Eisenhower