'Twas Ugly Killed The Beast: Low Oil Prices Didn't Defeat The Soviets

Many oil men continue to believe the myth that the 1986 oil price collapse was engineered by the U.S., with Saudi assistance, in order to hurt the Soviet Union. This is particularly loved because it plays into the desire to embrace the idea that oil prices should be “high” and the 1986-2000 period of $25 oil was an aberration. This obviously also supports the current flock of conspiracy theories intended to explain why oil prices aren't as high as some people want.

Unfortunately, the theory is based mostly on conjecture and cherry-picking of data, primarily the recognition that a) the Reagan Administration was anti-Soviet b) oil revenue propped up the Soviet economy, c) Reagan's advisers knew this, and d) the U.S. government communicated its desire for low prices to the Saudis.

All of this is true, but falls into the correlation equals causality trap. No U.S. government has sought higher oil prices, with the possible exception of early 1986, when prices had completely collapsed. And there is a much stronger correlation between market conditions and Saudi production policy than any political policies. Especially in the 1980s, when Saudi oil production dropped from 10 to 2.5 mb/d in five years, an oil price collapse was inescapable.

Beyond that, the idea that the Soviet collapse had to be engineered by outside forces completely ignores the incredible inefficiencies built into the communist system. Janos Kornai explained in 1986 that the theory of communist economics was simply flawed. (See his book Contradictions and Dilemmas.) Investment is driven by a variety of factors, few of which are related to the market. (Kind of like the US renewables industry now.) Ignoring political interference (always massive, almost always detrimental), the lack of appropriate signals means that managers game the system for their own benefit, rather than optimizing their operations. Most obviously, this means hoarding inventory, since you don't pay for it, but rather get approval from some bureaucrat.

No better example of the failure of heavy-handed socialism exists than modern-day Venezuela, where the government “solves” inflation by setting price controls, and fixes shortages by arresting store owners. Even when oil prices were $100 a barrel, the economy was going down the drain, a decline now accelerating–and which might lead to unrest in the oil patch and disruptions of supply.