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Volume 13, Number 3March 1962

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The Threat Of Soviet Oil

Russia is building her might with the sale of her oil.

For several years the export of oil from the Union of Soviet Socialist Republics and the Soviet bloc into free world markets has been a source of growing concern to many American oil men. They have watched closely as the volume of Soviet oil sales has steadily increased in Germany, Italy, Finland, Sweden, France, the Middle East and elsewhere. What troubles them is not the mere fact of Soviet competition, for that is a normal business risk. Their real concern is the system of state-controlled pricing and barter that Russia uses to penetrate free world oil markets.

More recently, Soviet oil has become the subject of news reports, magazine articles and speeches. Russian oil exports have been discussed on the floor of Congress, and Soviet trade agreements are being analyzed in government circles in Europe, Japan and the Middle East. Unfortunately, the subject of Soviet oil and its role in world trade is difficult to understand. The average person, already bewildered by the pace of space flight progress and the mounting complexities of world problems, hasn't the time to study the economic and political subtleties of Soviet export policy.

However, oil men who have kept a vigilant eye on the growth of Soviet oil exports point out certain underlying factors that provide an avenue to a general understanding of the subject. In the first place, the U.S.S.R. is now involved in a seven year program of economic expansion which will end in 1965. The plan calls for significant increases in her oil producing, transportation and refining capacities. Although official figures are not available, oil economists believe that the U.S.S.R. already rivals Venezuela for second place in world oil production. The United States is the leading oil producing nation.

Russia has set herself some very difficult goals in industrial production to be achieved by 1965. She is buying a vast array of technology from the West—complete factories, processing plants, automated assembly systems—in order to meet her goals. She must generate credit to buy freely in Western markets and in Japan. There is little time for her to develop the complex control systems (automation) that are the heart of much modern industrial production.

Also, she needs to buy thousands of miles of medium and large-diameter pipe for the long oil and gas pipelines she plans to add to her present system.

How is Russia to finance such tremendous purchases abroad? To a large degree, with oil. It is one commodity she can export without unduly affecting her domestic requirements. It readily lends itself to the Soviet policy of using exports as instruments of economic and political policy.

In her oil export program, the Soviet Union has come up against the fact that other oil exporting nations have built up a relatively stable competitive share of free world markets. Undaunted, the Soviet Union has devised a flexible system for entering these markets. The system is based on cut-rate prices and barter agreements, especially in countries where foreign exchange problems exist.

On the face of it, this seems like a fairly familiar trick—get a foot in the door and then slowly bring the prices up to normal. But for the past half-dozen years Soviet oil prices have undercut, sometimes severely, those of the free economics. Oil experts feel that Russia is unlikely to close the price gap for some time. And by then she may have a firm grip on a large share of world oil markets.

In order to understand Soviet oil pricing it is necessary to take a first-hand look at the Soviet pricing system at home. Such a look was taken by a delegation of United States petroleum experts who toured U.S.S.R. oil facilities.

They found that in the Soviet economic scheme the word cost is likely to mean something quite different from what it does in the West. Wages are set by the state, and prices are set by the state. Thus costs are whatever the state wants to say they are.

The key figure in Soviet oil pricing may well be the oil field and refinery worker. His role was examined about a year ago by the touring U.S. oil men. At Syzran, one of the older Soviet refinery towns, the average refinery worker was paid about 1,200 rubles a month. The value of this wage can best be shown by comparing it to the prices a worker pays for necessities. An overcoat costs about 1,000 rubles. Food for an average family of four costs from 1,500 to 1,800 rabies a month.

Just before a commodity is placed on the market, "turnover taxes" are added. G. T. Piercy, a member of the U.S. oil delegation, has observed: "The level of the tax depends upon whether they want to promote or depress consumption. This philosophy of pricing has its advantages when penetration of world markets is the goal."

The flexibility and control in such a system gives the Soviet Union an extremely free hand in undercutting oil prices in free world markets. It also permits the Soviet Union to maintain several categories of prices. The free world customer pays one price and the Soviet satellite country pays another, and much higher, price.

For example, a tanker cargo or 200,000 barrels of oil will be sold in the West for about $380,000. If sold in a satellite port, the cargo would bring Russia about $600,000.

The cost of a barrel of crude oil imported into Italy offers a look at Soviet oil pricing in a single Western market. The Italian Government has published a list showing the cost of a barrel of crude oil landed in Italy from various producing countries during 1960. Following are some of the prices covering crude oils of roughly comparable quality:

 Iraq   $2.46
 Iran     2.37
Qatar    2.31
 Saudi Arabia    2.29
 Venezuela    2.24
 Kuwait     2.19
 Russia    1.68

There is another factor involved that escapes the eye of someone who is not expert in the world marketing of oil. Let us say that a country enters into a trade agreement to purchase Soviet oil because of the low price. Time passes and the importing country cuts itself off from its past sources of oil. It develops a pattern of dependency upon the Soviet Union for an important energy raw material. Someone has called the entire Soviet petroleum industry "one of the largest integrated oil companies in the world, with an absolutely protected internal market, with no firmly established investments outside the Soviet bloc . . . and with the complete support of the Soviet economy and Government."

If this gigantic "oil company" should decide to cut down on exports, or shift its exports to new areas, or take some similar arbitrary action, the country which has come to depend upon Soviet oil might find itself suddenly hunting for a new supplier for all, or part, of its demand. In times of surplus oil and shipping, the country may find other suppliers to fill its needs. But in times of crisis or shortages of oil and shipping, other suppliers could not be expected to fill the gap left by the withdrawal of Soviet oil. In such circumstances, they naturally will put their major efforts into meeting commitments to their regular customers.

Russian foreign commerce is not what it seems to be: there is often some political sleight-of-hand behind Soviet exports. Soviet spokesmen say that all the U.S.S.R. seeks to do is to regain her historical position in world oil markets. In the early years of the century Russia was an important exporter of oil. After World War I she further developed her world markets. In the period from 1930 through 1933 her share of oil imports into Western countries was 19 per cent. In 1932, her peak year, she exported 120,000 barrels of oil a day.

Then she began to withdraw from export competition. Under Stalin the Soviet Union and its satellites sought economic self-sufficiency. Since Stalin's death in 1953, however, Soviet bloc exports of all kinds to the free world have increased 14 per cent per year. This annual growth is almost three times as fast as total free world exports have grown in the same period. Oil is by far the largest single item in this increased Soviet trade. In 1959 oil accounted for almost 20 per cent of the value of total exports to the free world from the U.S.S.R.

In the World War II era the Soviet Union was a net importer of oil. Her initial withdrawal from world markets was for reasons that had their roots in Stalinist economic policy reinforced by political policy. Her return to world markets has been based upon similar considerations which have led to the current Soviet seven-year plan of economic expansion. Thus, world oil requirements have been treated by the Soviet Union as a target of opportunity in an economic program. The Soviet goal, therefore, has not truly been one of regaining its old "historical position" as Russian leaders claim, but rather of putting a new edge on an old sword.

The main goals of Soviet expansion in free world oil markets appear to be these:

To acquire foreign credit, mainly in the West.

To buy strategic materials that will form a solid base for a modernized Soviet industrial economy; in other words, to build a stronger Russia.

To create dependence upon Russia for basic energy raw materials among nations that are becoming her oil customers.

Every time the Soviet Union sells a tanker of oil in the free world she adds to her foreign credit. And she has been remarkably successful in using this new buying power to acquire advanced technology in Europe. In a recent speech to the U.S. Senate, Senator Hubert Humphrey listed the following major purchases of strategic industrial equipment by the Soviet Union:

From the United Kingdom: an integrated modern tire-making installation and several complete plastics plants.

From France: an automated production line for manufacturing truck parts, a cement factory and two concrete panel plants (for pre-fabricated structural units).

From Germany: two chemical plants, a pulp-and-paper plant and a tubing mill to make pipe for oil pipelines.

From Italy: five complete chemical plants and the requisite processing rights from five major chemical firms.

Senator Humphrey also underscored a hidden advantage the U.S.S.R. enjoys by purchasing technology from the West. Such purchases leave Russian scientists free to devote their time to military and space research.

These purchases have not gone without notice in the free world. On the contrary, they have led to problems that are beginning to undermine the commercial relations of Western nations. Criticism of one nation by another for buying Soviet oil and selling strategic materials to her is growing. Russia alone can profit from such discord.

This hidden economic drama is being played out against a tremendous historical development. The world is moving rapidly toward industrialization. Already oil supplies nearly half of the energy consumption of the world. Thus, by its very nature, oil is fundamental to world industrial progress. It is linked inextricably to the mature ambitions of old nations and the fresh hopes of new ones.

It is to these expanding free world oil markets that the Soviet Union has directed her oil exports. Since 1953 production of Russian oil has nearly tripled. In the same period, exports to the free world have increased more than ten times, moving from 35,000 barrels a day to nearly 500,000 barrels a day.

What's more, these exports are expected to reach 750,000 barrels a day in 1965. And by the time a major Soviet pipeline system, now under construction, is completed, they may hit the million-barrel-a-day level.

The largest Soviet oil customers in Europe are Italy, Germany, Finland, Sweden and France. In 1959 Italy imported 15 per cent of its demand from the Soviet bloc. In 1960 the figure rose to 19 per cent. In 1960 the Soviet Union supplied 9 per cent of Germany's oil imports. Soviet oil supplies almost 80 per cent of demand in Finland, 14 per cent in Sweden and Austria, 11 per cent in Norway.

Since the expropriation of the oil industry in Cuba by Fidel Castro, the Soviet Union supplies all of that country's oil imports.

One member of the American delegation that visited Russian oil fields and refineries has said: "One of our national pastimes is underrating the other fellow. To underrate this particular other fellow is to invite disaster."

This article appeared on pages 3-7 of the March 1962 print edition of Saudi Aramco World.

See Also: OIL—U.S.S.R.

Check the Public Affairs Digital Image Archive for March 1962 images.