All About Oil

ALL ABOUT OIL….I am, I think, more inclined to give Ronald Reagan a share of the credit for the collapse of the Soviet Union than many of my fellow liberals. But while rock-jawed rhetoric and missile defense may have played a role in the demise of communism, they were hardly the overwhelming factors that conservatives play them up to be. I’m reminded of this by Yegor Gaidar, who, despite an obvious agenda of his own for saying so, tells a big part of the story here:

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 then faced with three options: start charging hard currency for oil exports, reduce food imports, or cut back military spending. None of them were seriously considered.]

Unable to realize any of the above solutions, the Soviet leadership…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….The Soviet Union then received a final warning from the Deutsche Bank and from its international partners that the funds would never come from commercial sources. Instead, if the Soviet Union urgently needed the money, it would have to start negotiations directly with Western governments about so-called politically motivated credits.

….When the situation in the Soviet Union is examined from financial and hard currency perspectives, Gorbachev’s policies at the time are much easier to comprehend (see figure 6). Government-to-government loans were bound to come with a number of rigid conditions. For instance, if the Soviet military crushed Solidarity Party demonstrations in Warsaw, the Soviet Union would not have received the desperately needed $100 billion from the West.

The only option left for the Soviet elites was to begin immediate negotiations about the conditions of surrender. Gorbachev did not have to inform President George H. W. Bush at the Malta Summit in 1989 that the threat of force to support the communist regimes in Eastern Europe would not be employed. This was already evident at the time. Six weeks after the talks, no communist regime in Eastern Europe remained.

Once it became clear that there would be no repeat of 1956 or 1968, every one of the Eastern bloc states seceded from Soviet control in short order and the Soviet empire was no more. Twas oil that killed the beast, not Star Wars.

Via Tyler Cowen.