Moscow's Capitalist Strategy

As that tall bar on the opposite page attests, the biggest oil producer in the world by far is not Saudi Arabia, or even the Persian Gulf nations combined, but the Soviet Union, which is pumping at the rate of 12 million bbl. per day. The U.S.S.R. is at present also the world's largest oil exporter (more than 3 million bbl. per day), and while most of its oil is sold to Eastern Europe and Cuba, more than 1 million bbl. per day go to Western Europe, and that figure is growing.

The Soviets have a pressing need for foreign exchange to finance purchases of food and technology from the West, and oil exports account for half their earnings of Western currencies. The drop in oil prices, accordingly, has been devastating for the Soviets. Each $1 decline in the price of crude deprives Moscow of $600 million to $750 million of hard currency. To compensate for this loss, the Soviets have been trying to sell more oil to the West. But as every good capitalist knows, one fast way to get sales up is to cut prices still more. Good Communists apparently know this too.

According to Marshall Goldman, a leading Sovietologist and professor of economics at Wellesley College, the Soviets began moving aggressively to increase their world market share as far back as 1981, months before sinking spot prices began to herald the end of the $34 OPEC bench mark. "By late 1981," says Goldman, "the Soviets were becoming cutthroat price cutters." Most of the cutting was done quietly; officially prices stayed in line with those of OPEC.

The strategy worked. Last year, even with Western oil imports falling, Soviet sales to the West rose from 1.1 million bbl. per day in 1981 to a rate of almost 1.5 million by the end of 1982. Goldman believes that Soviet oil exports to Italy doubled. This year, the Soviets let news of their price cuts seep out. The first cut, from $31.50 to $29.35, came in January. Last week, after OPEC announced its new $29 bench mark, word spread that the Soviet Union had cut prices again, to $27.50.

In the long run, the Soviet Union's aggressive pursuit of Western currencies may prove politically expensive. The increase in oil sales to the West has come at the expense of heavily subsidized sales to its East European allies. Further reductions "will be a serious burden to the economies of Eastern Europe," says Richard Pipes, professor of history at Harvard and former Soviet expert on the National Security Council.

For the West Europeans, declining oil prices are in one sense a mixed blessing: the controversial Soviet natural-gas pipeline is much less attractive than before. Among the terms the Europeans granted the Soviets was a guaranteed floor price on 80% of the gas delivered. It was pegged to correspond with the benchmark price then in effect for OPEC oil: $34 per bbl. This file is automatically generated by a robot program, so viewer discretion is required.