THE ENERGY OUTLOOK AND ITS IMPLICATIONS FOR THE USSR AND EASTERN EUROPE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP05T00644R000601670004-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 16
• Document Creation Date: December 22, 2016
• Document Release Date: November 10, 2010
• Sequence Number: 4
• Publication Date: February 1, 1980
• Content Type: REPORT

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National Confidential
Foreign
Assessment
Center
The Energy Outlook and
Its Implications for
the USSR and Eastern Europe
4,13
Confidential
ER 80-10102
February 1980
Copy 3 4 0
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National Security Unauthorized Disclosure
Information Subject to Criminal Sanctions
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National Confidential
Foreign
Assessment
Center
the USSR and Eastern Europe'
The Energy Outlook and
Its Implications for
An Intelligence Assessment
Research for this report was completed
on 8 February 1980.
This paper was prepared by tlj
nated with the Office of Political Analysis and the
National Intelligence Officer for Political Econo-
ice of Economic Research. been coor i-
Confidential
ER 80-10102
February 1980
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The Energy Outlook and
Its Implications for
the USSR and Eastern Europe
Overview Constraints in energy supply threaten to push economic growth in the USSR
and Eastern Europe to very low levels in the 1980s.
As a result, annual increments to national output in the 1980s may be too
small to permit the increases in investment and consumer goods and services
needed to sustain reasonable economic growth and maintain an acceptable
level of consumption. If the flow of resources allocated to investment cannot
be stemmed without causing future output increments to fall and if defense
allocations remain inviolate, consumer welfare and living standards will be
severely reduced-with all the political hazards that this would entail.
A prospective decline in Soviet oil production is only part of the problem.
Coal output is stagnant, and the rapid growth of natural gas production
cannot bail the USSR out, because gas-oil substitution possibilities will
remain severely limited through much of the 1980s. Meanwhile, energy
savings through conservation have been and will continue to be limited.
Because Eastern Europe depends so heavily on Soviet energy supplies and
cannot afford to buy much oil elsewhere, falling Soviet oil production in the
early 1980s will curtail Eastern Europe's economic growth as well.
Soviet leaders remain optimistic about the USSR's energy prospects over
the very long run, based on coal and nuclear power. They are, however, very
aware of the potentially severe oil crunch in the 1980s and its implications
both for their own economy and that of Eastern Europe. Moscow realizes
that it must somehow ensure the flow of enough energy or face a nearly
stagnant economy and political unrest.
The outlook for obtaining the needed amount of energy in the right mix,
however, is dismal. The spiraling price of oil, coupled with slower growth of
Western markets, will limit Soviet and East European ability in the mid-
1980s to pay for the imports of oil required just to sustain even the current
consumption levels. Thus, the Soviet and East European leaders realize that
they must intensify their efforts to obtain oil at concessionary prices from
the oil-producing developing countries-through arms sales, barter deals,
and development assistance. The prospects for concessionary deals, however,
with OPEC countries-except in the case of Libya-appear increasingly
poor. Eastern Europe is strapped for hard currency now, severely limiting its
purchases. This situation will increasingly apply to the USSR, as it loses its
oil export earnings and becomes a net importer of oil for hard currency in the
mid-1980s.
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The Soviets may have miscalculated both their own capacity to supply oil to
Eastern Europe in 1981-85 and the East Europeans' capacity to (1) acquire
oil from OPEC countries, (2) substitute coal for oil, or (3) reduce economic
growth and consumption without provoking unrest. The Soviet attitude
seems to be that the East Europeans are going to have to pull in their belts
just as the Soviets have. Although disturbances in Eastern Europe would be
highly undesirable, the USSR may not be prepared to pay any price to avoid
the use of military force, even against Poland.
Faced with the prospect of a critical Warsaw Pact dependence upon OPEC
sources of oil supply, the Soviets could opt for an aggressive policy in the
Middle East. They might, in desperation, consider such radical action as a
unilateral military seizure of Iran's oilfields. Iran's oil supply, secured more
or less intact, would go a long way toward alleviating the economic problems
facing the Warsaw Pact nations in the mid-to-late 1980s. The Soviets would
have to weigh this benefit against the extraordinarily high risk involved in
such a step.
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The Energy Outlook and
Its Implications for
the USSR and Eastern Europ~
The USSR
The USSR is the world's leading oil producer, with
11.7 million barrels per day in 1979. Production
growth, however, has slowed markedly in recent years;
the 1979 increase of about 280,000 was the smallest
absolute increase since 1956. The 1980 goal of 12.1
million b/d has been revised down*ard from the
original plan of 12.4-12.8 million b/d, but it is unlikely
that even this target will be reached.
Oil production is now declining in all of the major oil-
producing regions except West Siberia, and even there
gains are uncertain now that the supergiant Samotlor
oilfield has reached its peak. Samotlor, which has
accounted for the bulk of production growth in recent
years, is likely to slump in the next year or so and then
fall rapidly. Meanwhile, the decline already underway
in older major producing regions probably will acceler-
ate as reserves are depleted.
As a result, chances are good that Soviet oil production
will peak this year at less than 12 million b/d before
falling. By 1985, Soviet oil output probably will fall to
between 8 million and 10 million b/d and is likely to
decline still further after 1985. The upper end of the
range predicted for 1985 assumes that exploration is
relatively successful, development drilling goes well,
and the Soviets can acquire the needed equipment and
technology, mainly from the West. If things go poorly,
output could fall as low as 8 million b/d in 1985.
Beyond 1985, production probably will continue to
decline, although at a slower rate. In the long run, the
future of Soviet oil production depends on Soviet
success in discovering and developing oilfields in new
areas-primarily in the Barents and Kara Seas, the
deep waters of the Caspian Sea, Eastern Siberia, and
the deep onshore Caspian depression-and in exploit-
ing large, known reserves of heavy oil. None of these
areas have been explored intensively, and any new
finds would have little impact on oil production until
the late 1980s or early 1990s. Moreover, the Soviets
still must find a way to extract the heavy oil that is not
producible by conventional means.
Development of the offshore areas and deep onshore
basins will require Western equipment and technology.
Even so, much of the technology for exploring and
developing resources in the Barents and Kara Seas is
not even available in the West, thus complicating and
prolonging the ultimate exploitation process.
If the Soviets manage to find and develop large
deposits in new areas, the oil production decline could
be halted or even temporarily reversed, but probably
not before the 1990s. These judgments draw a
discouraging picture of Soviet oil prospects. They rest
on our analysis of the USSR's reserve situation and
drilling requirements.
Inadequate Reserves. Recent Western estimates, based
on the study of oil basins and major oilfields, place
Soviet recoverable reserves at about 50 billion barrels,
although we believe them to be less-on the order of
30-35 billion barrels. Some of the proven reserves will
be difficult to develop, however, since the majority of
large fields discovered in recent years have been heavy,
even "nonflowing" oil.
Reserves are being depleted rapidly in all major
producing regions while the discovery of new reserves
is lagging. The Soviets have repeatedly emphasized the
need to develop a new oil province comparable to
Western Siberia during 1976-80. But no new giant
oilfield has been discovered since 1973. Large unex-
plored areas of the USSR may contain substantial oil
and gas, but they are remote and their potential is
unknown.
Reserves of conventional oil in areas that are currently
producing are inadequate to support the present level
of production after 1980. The major structures have
already been found, and remaining oil lies in smaller,
deeper, highly pressured, and difficult-to-detect struc-
tures. The USSR has allowed exploratory drilling,
especially wildcatting, to lag. Moreover, given the
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USSR: Oil Production Trends and Projections
existing deficiencies in geophysical and drilling tech-
nology, rapid development of new reserves in oil
regions will be very difficult.
With the growing role of heavy oil and a need to boost
recovery rates in older fields, enhanced recovery
techniques become more important. Enhanced recov-
ery methods-mostly thermal-produced an average
of only 40,000 b/d during 1976-78, less than 0.4
percent of total production. A 1979 Soviet press report
indicated that only 2 percent of the necessary equip-
ment for enhanced recovery was available and existing
equipment was not working well. Enhanced recovery
methods are not likely to help much in the 1980s
because they are expensive, have long leadtimes, and
involve substantial imports of Western technology.
Drilling Requirements. In trying to avert a drop in oil
production, the Soviets have raised drilling targets and
have emphasized the development of West Siberian
oil-their only hope for stabilizing production in the
early 1980s. The increased drilling needs are largely
explained by the accelerating depletion of fields in
older regions and by the declining productivity of new
wells. The drilling goals, which call for the Petroleum
Ministry to drill 75 million meters in 1976-80-4
million meters more per year than in 1971-75-appear
out of reach; the Soviets have fallen far short of this
target thus far. During 1981-85, Soviet oilmen say that
drilling will have to be twice the 1976-80 total (about
150 million meters) just to maintain production at the
1980 level.
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Almost all of the planned drilling increases are slated
for West Siberia, but even there drilling targets are not
being met. Part of the problem is that oil production
has run ahead of the installation of the infrastructure
necessary to support the oil and gas industries. In mid-
1978, of the 10 new fields that were developed after
January 1976 in the more remote areas, none had
roads and only two had electric power connections.
West Siberian construction organizations do not have
the capacity to handle increasing demands. The
inadequate road-building program, for example, seri-
ously endangers the entire drilling plan. Demands on
transportation cannot keep pace with West Siberian
development. Drilling alone requires 1 ton of freight
per meter drilled. Demands on the railroads are
especially heavy in the winter months; since few all-
weather roads are available, much of the equipment
must be delivered to the remote oilfields when the
surface is frozen.
In older oil-producing areas such as the Volga-Urals
and Azerbaydzhan, considerable effort is required
simply to minimize declines in production. Extensive
in-fill drilling, construction of oilfield facilities, and
use of electric centrifugal submersible pumps will be
necessary. Since drillers, equipment, and skilled oil-
field workers are being diverted from older regions to
work in Western Siberia, production declines in the
Volga-Urals and elsewhere could be steeper than the
Soviets anticipate.
Fuel Substitution Not the Answer
Rising production of natural gas and coal, which in any
case are not fully substitutable for oil, will only
partially offset the decline in oil output.
Natural Gas. Although gas reserves are large and
yearly output goals were surpassed in 1976-79, a
future slowdown is likely. All growth in production
must come from the permafrost regions of the northern
part of West Siberia. The cost and physical difficulty
of developing deposits there and piping the gas
thousands of kilometers pose unprecedented problems.
Lack of infrastructure, harsh Arctic conditions, and
dependence on Western supplies of large-diameter pipe
compressors and valves are likely to hinder exploration.
Production from the country's other major gasfields in
the Ukraine, Northern Caucasus, and Central Asia
peaked in 1976 and has begun to decline.
Coal. Meanwhile, coal production has been a huge
disappointment as targets have been underfulfilled by
a wide margin. The Five -Year Plan's original goal for
1980 of 805 million tons is unlikely to be reached, even
by 1985. Coal production fell in 1979 and at 719
million tons was a scant 1 percent above the 1976 level.
New mine capacity has been slow coming on stream
while mine depletion has been rising, especially in
older basins in the Western USSR. New coal basins
are located in Siberia, far from major consuming
centers, and much of the coal is poor-quality-low in
heat value, hard to ship, or not adaptable for use in
existing Soviet boilers.
Nuclear Power. Although Moscow assigns a high
priority to nuclear energy, its role in energy output will
be minor in the coming decade. Installed nuclear
capacity is now about 10,000 megawatts (MW).
Output of nuclear-generated electricity was about 50
billion kilowatt-hours in 1979 and accounted for less
than 1 percent of primary energy output. Projections,
which have been scaled down by the Soviets in recent
years, now call for 35,000 to 40,000 MW in capacity
by 1985 (less than 4 percent of all energy) and 100,000
MW by 1990. Almost all of this capacity is to be
developed in the European USSR.
Leadership Reactions to the Energy Problem
Soviet leaders have been aware of growing energy
problems since at least the early 1970s but did little
about them until 1977. Their response was to boost
investment in oil and gas and to step up the drive for
energy conservation.
Investment. In December 1977 Brezhnev established
the fuel-energy sector as a "leading link," meaning
that the sector had priority for the investment that
would achieve "maximum and rapid results." Within
this sector, emphasis was placed on hydrocarbon (oil,
gas and coal) production and the urgent development
of the Tyumen' Oblast in Western Siberia.
The investment originally planned for 1976-80 in
primary energy production has been increased on a
crash basis. In 1978 the increment in investment in oil,
gas, and coal nearly doubled and accounted for almost
one-half of the increase in total industrial investment.
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Conservation. Brezhnev admitted to the Central Com-
mittee Plenum in November 1978 that despite the
expenditure of 50 billion rubles on conservation
measures, "in practical terms there is no lessening of
waste and losses" of fuels.
Practically all of the potential energy saving is
concentrated in six sectors' representing almost 80
percent of Soviet oil consumption. The savings that
conservation efforts can wring out of the economy are
limited because the efficiency of heat production,
electricity generation, and rail transport using existing
capital stock is already high; because the Soviets are
slow to convert to more energy-efficient equipment;
and because of constraints on the substitution of other
fuels.
Conservation in the heat and power sector has been
given considerable emphasis, with fuel requirements
per unit of electricity output declining 11 percent
between 1970 and 1979. Improved efficiency was
achieved largely by upgrading generating equipment;
almost all obsolete equipment has been replaced. The
Soviets are world leaders in cogenerating heat and
electricity, with more than 1,000 combined heat and
power plants in operation.
As for the transport sector, energy consumption per
ton-kilometer and passenger-kilometer is much lower
in the USSR than in Western Europe or the United
States. The USSR uses only one-fourth as much
energy per passenger-kilometer as the United States
and only about two-thirds as much per ton-kilometer of
freight. Thus, we see little opportunity for additional
savings in Soviet transport.
Industrial energy savings will be slow in coming. Steel
is the second largest oil-consuming industrial sector,
and the Soviets intend to make this their next
conservation effort. Nonetheless, the substantial re-
placement of heavy, oil-consuming machinery in steel
and other industries takes time.
Some oil conservation can be achieved by the substitu-
tion of other fuels, principally natural gas. A signifi-
cant proportion of Soviet heat and power plants
' Electricity and heat generation, iron and steel production, the
residential-communal sector, construction, transport, and
agriculture.
already switch from oil to gas on a seasonal basis, and
increased gas supplies to this sector would reduce oil
consumption. However, 54 percent of Soviet oil is
consumed in internal combustion engines, and large-
scale conversion can only come very slowly. There are
also limitations in the near term in the degree to which
coal and nuclear power are practical substitutes for oil
in generating heat and power. Major coal mines are
distant from consumption centers, and the declining
heat value of mined coal (down 10 percent in 10 years)
is offsetting the increase in volume. Nuclear power
substitution is constrained by long leadtimes in install-
ing capacity.
Real growth in gross national product has been falling
in the USSR and is expected to drop further in the
1980s. Meanwhile, energy consumption in the USSR
has traditionally risen about as fast as GNP, primarily
because of the emphasis given to expanding energy-
intensive heavy industry. This has occurred despite
(1) the rapid shift in the USSR away from coal and
toward the use of oil and gas, which burn more
efficiently than coal, and (2) massive investment in
cogeneration and the electrification of railways, mea-
sures that also improved energy efficiency. In contrast,
the energy intensiveness of output in industrial West-
ern economies has declined markedly since 1973. Since
the Soviets probably cannot shift industrial priorities
sufficiently in the next six years to effect measurable
energy savings, we project energy requirements to
continue to grow about as fast as GNP during
1981-85.
Energy as a Constraint on Growth
During the early and mid-1980s energy supplies will be
critical for economic growth. During the last two
decades, the Soviet energy supply base expanded much
faster than the growth in internal demand. As a
consequence, the USSR is now a major energy
exporter with present net energy exports of about 4
million b/d oil equivalent. Oil accounts for three-
fourths of this figure. Shifts now underway in the
underlying supply situation-especially the expected
drop in oil production-will cause a fundamental
change in this relationship. If oil production falls to 9
million b/d by 1985, the growth of total energy
production will slow greatly, from an average of about
1 million b/d oil equivalent per year (or 4 percent)
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during 1976-80 to an average of only 200,000 b/d oil
equivalent per year during 1981-85 (less than 1
percent per year).
On the basis of our growth projections for the labor
force and capital stock in the USSR in 1981-85, we
think GNP could grow by about 3 percent per year, if
there were no energy constraint. But GNP growth at
this rate would also require an increase in domestic
energy consumption of 3 percent per year. In addition,
other Communist countries now receive about 2.5
million b/d of Soviet energy-mainly oil-and will
probably have to have at least this much in the 1980s to
stave off economic disaster.
To meet both domestic requirements and exports to
Eastern Europe, the USSR would have to import about
4 million b/d of energy from the West on a net basis by
1985; in 1979, it exported 1.3 million b/d of energy for
hard currency. Practically all of the energy imported
would have to be in the form of oil. Moscow clearly
could not afford to buy oil on this scale-about $40
billion worth of imports in 1985 at the oil prices
prevailing in January 1980. First of all, the shift to a
net import position would deprive the USSR of its
major source of hard currency. In 1979, the Soviet
Union sold about 900,000 b/d of oil to the West for
about $9 billion, about half of its hard currency
receipts from merchandise exports. Moreover, even
under optimistic assumptions concerning Soviet hard
currency export earnings, the oil bill would greatly
exceed Soviet import capacity of an estimated $15
billion in 1985 (1980 prices). Oil imports this large
would obviously exhaust Soviet hard currency re-
sources. Increases in oil prices relative to other
commodity prices, which are almost certain to occur by
1985, simply would curtail Soviet import capacity even
further.
The Soviet energy shortfall would thus have to be
absorbed through a combination of slower economic
growth and adjustment in fuels trade. The exact mix of
adjustments-in the domestic Soviet economy and in
trade-is unpredictable. Illustrative projections as-
suming a reasonable combination of policy shifts in
several areas-energy, fuel substitution, manpower,
and hard currency trade but maintaining Soviet oil
exports to Eastern Europe-show Soviet economic
growth falling from around 3 percent in 1981 to little
more than 1 percent by 1985. Included in these
estimates is a projected shift in Soviet oil trade with the
West-from a current surplus of roughly 900,000 b/d
to a deficit in 1985 of about 600,000 b/d ($6 billion).
Substantially higher oil imports would not be
affordable if imports of grain and capital goods are to
be maintained even at minimal levels. Nonetheless,
imports of Western machinery would decline substan-
tially in the face of slowly expanding import capacity
and heightened competition from other uses of Soviet
hard currency earnings.
The impact of oil shortages on the Soviet domestic
economy is not just a matter of reduced economic
growth. Soviet leaders are probably well aware that the
much smaller increment to national output available
annually in the 1980s could not sustain the increases in
investment and consumer goods and services that the
USSR would need each year to sustain reasonable
economic growth and maintain an acceptable level of
consumption.
If there is no reduction in the growth of resources
allocated to defense and investment-and the latter
would have to be maintained to keep future output
increments from falling even further-then consump-
tion and thus living standards would fall. Maintaining
the same shares of a much smaller GNP pie would not
be much better. Consumption would still fall by the
mid-1980s. This could have a profound impact on labor
productivity while increasing tensions within the Polit-
buro and the population.
Eastern Europe
Eastern Europe imports about one-fourth of its energy
consumption. About three-fourths of the imported
energy comes from the USSR just under 85 percent,
if Romania is excluded. The Soviet energy crunch and
spiraling OPEC prices have forced Eastern Europe to
reevaluate long-established patterns of both consump-
tion and production.
Energy Strategies. After 15 to 20 years of increasing
reliance on oil and gas, most East European countries
are again emphasizing coal production and are count-
ing on more nuclear power capacity. But with the
exception of Poland, which has large hard coal
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USSR: Primary Energy Balance'
Total Supply
14.14
17.96
23.17
27.32
Production
14.01
17.74
22.67
26.92
Crude Oil'
4.84
7.03
9.82
11.71
Natural Gas
2.10
3.27
4.79
6.74
Coal
5.77
6.05
6.60
6.77
Peat, shale, fuelwood
0.81
0.74
0.76
0.65
Hydroelectric power'
0.48
0.64
0.60
0.81
Nuclear Power 4
0.01
0.01
0.10
0.24
Imports
0.13
0.22
0.50
0.40
Crude oil & petroleum products
0.04
0.09
0.15
0.15
Natural Gas
0.00
0.06
0.12
0.12
Coal & coke
0.09
0.07
0.14
0.13
Total Requirements
14.14
17.96
23.17
27.32
Consumption
12.74
15.62
19.82
23.20
Crude oil'
3.59
5.22
7.37
8.90
Natural gas
2.09
3.27
4.68
6.06
Coal
5.76
5.74
6.32
6.55
Peat, shale, fuelwood
0.81
0.74
0.76
0.65
Hydro and nuclear power
0.49
0.65
0.69
1.04
Exports
1.40
2.34
3.35
4.12
Crude oil & petroleum products
1.29
1.90
2.60
2.96
Natural gas
0.01
0.06
0.32
0.80
Coal and coke
0.10
0.38
0.42
0.35
Electric power
NEGL
NEGL
0.01
0.01
Net Exports
1.27
2.12
2.85
3.72
Crude oil & petroleum products
1.25
1.81
2.45
2.81
Natural gas
0.01
0.00
0.11
0.68
Coal and coke
0.01
0.31
0.28
0.22
Electric power
NEGL
NEGL
0.01
0.01
Excluding losses and additions to stocks.
' Preliminary estimate.
' Including gas condensate.
' Converted by using factors corresponding to the average amount of
fuel required to produce electricity in thermal power plants in the
USSR.
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Table 2 Million b/d Oil Equivalent
Eastern Europe: Primary Energy Balance'
Total Supply
5.50
6.75
8.11
9.20
Production
4.57
5.28
5.83
6.32
Crude oil
0.32
0.34
0.36
0.35
Natural gas
0.38
0.64
0.85
1.00
Coal
3.81
4.23
4.49
4.79
Hydro & nuclear'
0.06
0.07
0.13
0.18
Imports
0.93
1.47
2.28
2.88
Crude oil & petroleum products
0.49
0.94
1.55
2.00
Natural gas
0.01
0.04
0.19
0.30
Coal & coke
0.40
0.42
0.43
0.44
Electric power
0.03
0.07
0.11
0.14
Total Requirements
5.50
6.75
8.11
9.20
Consumption
4.80
5.94
7.12
8.16
Crude oil
0.59
1.07
1.66
2.06
Natural gas
0.39
0.68
1.03
1.30
Coal
3.75
4.09
4.25
4.55
0.07
0.10
0.18
0.25
0.70
0.81
0.99
1.04
0.21
0.21
0.26
0.28
NEGL
NEGL
NEGL
0.01
0.23
0.66
1.29
1.84
Crude oil & petroleum products
0.28
0.73
1.29
1.72
Natural gas
0.01
0.04
0.19
0.29
Coal & coke
-0.07
-0.14
-0.25
-0.24
Electric power
0.01
0.03
0.06
0.07
' Including Bulgaria, Czechoslovakia, East Germany, Hungary,
Poland, and Romania. Excluding losses and additions to stocks.
' Detailed data for 1979 not available.
'Converted by using factors corresponding to the average amount of
fuel required to produce electricity in thermal power plants in
Eastern Europe.
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reserves, the long-term prospects are poor for substan-
tial expansion of coal production. The rest of the region
must rely on increasingly poorer quality brown coal
and lignite. Most of the East European countries have
ambitious plans calling for nuclear power to supply
from 10 to 25 percent of their energy needs by the turn
of the century, but for the next decade, only Bulgaria
will have significant nuclear power capacity for its own
needs. Romania, the only East European country with
gas and oil reserves, is also facing energy problems. Its
oil and gas reserves are being depleted, and production
for the coming decade will fall.
Conservation Measures Not Yet a Factor. Current
energy conservation programs in Eastern Europe on
the whole have been marked by a reliance upon
administrative measures and an unwillingness to
clamp down on demand in industry and agriculture.
(Only Poland has introduced some industrial conserva-
tion measures.) The measures adopted have affected
most households and government offices, but these
sectors account for only 15 to 25 percent of energy use.
Restructuring national output, that is, changing pro-
duction and growth priorities to less energy-intensive
goods and services, runs counter to traditional Com-
munist growth theory and, even if politically feasible,
requires long leadtimes. Aged, obsolescent machinery
and equipment burn up an inordinate amount of fuel,
but hard currency constraints limit the ability of all
East European nations to import advanced, more
efficient equipment. Finally, increasing reliance on
generally abundant domestic coal and lignite reserves,
as other more efficient energy sources become scarcer
and more expensive, constrain possibilities for reducing
energy use per unit of output.
Prospects for Imports. Soviet energy exports to East-
ern Europe will expand little, if at all, in the 1980s.
Total energy exports are expected to remain at about
the 1980 level of 2.3 million b/d oil equivalent, and oil
exports at 1.6 million b/d. With Soviet oil deliveries
leveling off after 1980, Eastern Europe will be forced
to turn increasingly to non-Communist sources. East-
ern Europe now imports about 450,000 b/d of non-
Soviet crude oil-two-thirds by Romania-mostly
from OPEC. Slack Western demand, Western trade
restrictions, and uncompetitiveness of East European
goods in Western markets hinder Eastern Europe's
ability to earn the hard currency needed to increase oil
imports. At the same time, relatively high debt service
and tightening conditions in international money
markets cloud the prospects for large-scale future
borrowing.
In the past, Eastern Europe has relied to a great extent
on barter agreements to pay for Middle Eastern oil.
The East Europeans, as well as the Soviets, realize that
they must intensify their efforts to obtain oil at
concessionary prices from the oil-producing less devel-
oped countries through arms sales, barter deals, and
development assistance. In 1978 this objective was
explicitly formulated in the energy program of the
Council for Mutual Economic Assistance (CEMA).
However, the prospects for concessionary deals appear
increasingly poor. And in 1979, negotiations with
Middle Eastern governments, CEMA members got
much less oil, even for hard currency, than they hoped
to get. At best, CEMA members face great difficulties
and uncertainties in obtaining any substantial increase
in oil deliveries through government-to-government
deals with OPEC countries, while prospects for large
purchases from the multinationals are even dimmer.
Impact of Energy Shortage on Growth. The East
European energy squeeze-combined with slow
growth in the working-age population, sluggish
productivity, a limited raw material base, and
overcentralized and clumsy planning and manage-
ment-foreshadows a rather dismal economic decade
for Eastern Europe. We estimate that balance-of-
payments constraints will limit East European pur-
chases of oil to about 450,000 b/d in 1985-about
what they now buy for hard currency-which would be
valued at about $4-5 billion-at January 1980 prices.
Economic growth, as a consequence, will slow even
further in the next six years to perhaps 1 to 2 percent
per year compared with an annual average of 4 percent
in 1971-79. .
Political Aspects
Soviet leaders and specialists are fully aware that the
USSR in the 1980s faces serious energy problems.
Available evidence suggests that Soviet production
officials think that oil output has just about peaked and
will decline if urgent measures (including acquisition
of Western technology) are not taken. It is not clear,
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however, how long they think peak production can be
held or whether they agree with our forecast. Although
the top political leadership may believe that a signifi-
cant drop in oil production can be avoided during the
early 1980s, they probably have been told that such a
drop is a distinct possibility.
We doubt, however, that the mounting energy prob-
lems of the 1980s have shaken the confidence of the
Soviet leadership and bureaucracy in the very long-
term energy prospects of the USSR. They are counting
on the huge proven coal and natural gas reserves of the
country and are hopeful that large new reserves of oil
will be discovered.
They are accelerating their nuclear power program,
and they express confidence in the future of breeder
reactors. This vast potential energy base, they believe,,
gives the USSR a fundamental strategic advantage in
the evolving world balance of power. The "energy
problem," as they see it, is essentially a matter of
transportation, steeply rising fuel extraction costs, and
technological lag-difficulties which they believe can
and will be overcome in a decade or two, with or, if
necessary without Western assistance.
As oil production falters, Soviet decisions on how to
allocate oil among competing uses-domestic con-
sumption, exports to the non-Communist world, and
exports to Communist countries-will become increas-
ingly hard and painful. Presumably, the need to avert
too sharp a drop in GNP growth domestically and to
guard against political instability in Eastern Europe
makes exports to the West the most expendable use.
The most difficult and critical choice probably will be
between domestic consumption and exports to Eastern
Europe. As noted earlier, we expect the USSR to try to
maintain energy deliveries to its Warsaw Pact allies at
about the 1980 level and to continue to offer much of
the energy shipped on at least moderately con-
cessionary terms. To steeply reduce oil exports-and
thus total energy exports-would accentuate the
anticipated decline in Eastern Europe's economic
growth by aggravating energy shortages and/or forc-
ing Eastern Europe to turn to higher cost energy from
alternative suppliers.
The slower economic growth is in Eastern Europe, the
greater the likelihood of political instability there,
particularly since the share of output devoted to
domestic uses is already on the decline because of the
need to reduce balance-of-payments deficits. How to
divide output domestically creates a dilemma for East
European regimes: the more production devoted to
investment, the worse off consumers are in the present;
the more production devoted to consumption, the
slower future economic growth is likely to be.
The prospect of stagnating living standards in Eastern
Europe is doubtless disquieting to Moscow. Deteriora-
tion in material well-being in Eastern Europe would
increase public resentment toward the Soviet Union
and would cause more intense factionalism within East
European leadership groups.
It is quite possible that the Soviets have miscalculated
(a) their own capacity to supply oil to Eastern Europe
in 1981-85, and (b) the East European capacity to
acquire oil from OPEC countries, substitute coal for
oil, or reduce economic growth and consumption
without provoking unrest. The Soviet attitude, how-
ever, seems to be that the East Europeans are going to
have to pull in their belts just like the Soviet
population. While disturbances in Eastern Europe
would be highly undesirable, the USSR would not be
prepared to pay any price to avoid the use of military
force, even against Poland.
Given the possibilities of alarmingly low GNP growth
in the USSR and conceivable economic and political
disorder in Eastern Europe, the Soviets may consider
pursuit of an aggressive policy in the Middle East.
Certainly they are aware that access to Iran's oil
supply would help alleviate the economic problems
facing them and their allies in the mid- and late-1980s.
The Soviets will be seeking means to ensure the flow of
energy in the next decade to support their own
economy and those of Eastern Europe, and the outlook
is not encouraging. The spiraling oil cost will motivate
the USSR to seek oil at concessionary prices through
arms sales, barter deals, and development assistance as
suggested above. Most OPEC countries appear disin-
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terested in this type of arrangement, and the Soviets
certainly must hope for a leftist, pro-Soviet govern-
ment in Iran which would be receptive to this type of
arrangement. Certainly their primary objective in Iran
is to achieve precisely this type of government.
The Soviets might, in desperation, undertake a unilat-
eral military thrust into Iran, designed primarily to
occupy the Khuzestan oilfields. While such an action is
not beyond the realm of possibility, it presents the
Soviets with enormous difficulties. They must first of
all take into account US statements with respect to
having a "vital interest" in the Persian Gulf and the
West's continued reliance on Iranian oil. They would
be aware that they were running a very high risk of
direct military confrontation with the United States;
they know that Iraq has claims to Khuzestan and
would view such action as a major threat to itself; and
they would have to weigh the broader and very grave
international repercussions of such aggression.
They would also have to recognize the difficulty of
permanently occupying Iran and the prospect of
having to protect the valuable oilfields against pro-
longed guerrilla insurgency. It seems unlikely that the
Soviets would seize Khuzestan in the near term unless
they were "invited" to intervene by a new Iranian
regime that enjoyed at least some degree of interna-
tional recognition.
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