For a number of years, US energy policy has encouraged the search for oil outside the country, but away from the Persian Gulf. This approach recognizes first that access to those areas of the United States considered geologically attractive, but out-of-bounds for environmental reasons, will continue to be denied. Second, it accepts that the politically unstable Persian Gulf, where the bulk of the world's oil reserves are located, cannot assure a secure oil supply. Because security of supply is valued above all other considerations in today's market, national and international policies must be adjusted to provide that security through diverse sources. As a result of this policy, the United States presently imports oil from some 60 countries, a policy that would appear to offer the desired protection. But because the United States is not isolated from the volatilities of the world oil market, even this diversity of importers is insufficient to guarantee the desired security.

It has been argued, for example, that the United States should reduce its dependence on Saudi Arabian oil as a way of reducing its import vulnerability. After all, Russia is now the second leading oil producer and exporter, has proven itself to be a reliable supplier to the world market for a number of years, and has indicated that it is prepared to respond to US needs. That approach simply ignores the reality of how the oil market functions. However, the argument is appealing because Saudi oil imports could be halted by government edict, if it were concluded that such actions would serve US interests. What then? Saudi oil would find other markets and the United States would have to turn to other, possibly less reliable, suppliers.

Given the status of oil as an international commodity, and given that no state is immune to the workings of the world oil market, what can be done to maximize the reliability of the market? There seems to be only one answer, and that is to continue the search for and development of oil supplies outside the Persian Gulf. Today, emphasis is placed on Africa, particularly West Africa, and deepwater resources in the Gulf of Mexico and offshore Brazil.

In recent years, media coverage has focused on the oil and gas production and export potential of the Caspian Sea and Central Asia, which some initially believed would become a substitute for the Persian Gulf. After further research, however, most analysts now place it on par with that of the North Sea. This reassessment nonetheless does not detract from the importance of the Caspian Sea and Central Asia as important marginal suppliers. Developing these regions will give importers another choice among suppliers, which then translates into greater security of supply.

This latter consideration motivated the very vocal US support for the development of Caspian oil and gas production and the construction of export pipelines, intentionally bypassing both Russia and Iran.

Looking to Russia

As late as 1988, Russia was the world's leading oil producer, at 11.4 million barrels per day (bpd). Then, in mid-1980, production began to collapse, a result brought about not by developments in the marketplace or war but by oil field mismanagement and a lack of fresh investment capital. The decline continued through the mid-1990s, when output hit a low of barely six million bpd.

The question then arose, how much further might production drop? The answer came in a somewhat unexpected way. First, the sharp ruble devaluation in the late 1990s reduced costs and stimulated production. Domestic demand was holding relatively constant, meaning most of the production increments became available for export. Then the Organization of Petroleum Exporting Countries (OPEC) began to raise oil prices by reducing supply. Prices did respond, providing an additional incentive to the now privatized Russian oil companies.

Russian oil producers quickly responded to these incentives and output is expected to average 7.5 million bpd during 2002. Of that volume, some five million bpd of crude oil and petroleum products will have been exported to buyers outside the country. Russia now stands second only to Saudi Arabia in terms of oil production and exports, though the Saudis hold that advantage by continuing to violate their OPEC-defined quota by nearly one million bpd as of October 2002. This presents a challenge to OPEC, at least in its effort to sustain prices, and diverts attention from the Caspian Sea and Central Asia.

Is this Russian oil growth sustainable and, if so, for how long? Russian oil potential has never been in doubt, but concerns have been raised as to how that potential might be utilized. Assessing the former Soviet oil industry has proven to be particularly difficult and not especially successful. During the past four decades, analysts have bought into four beliefs. The first three have been proven wrong and abandoned—and the current belief should be as well.

In the very early 1960s, the United States bought into the belief that the Soviet oil potential would be employed as a political weapon, flooding the world oil market and bringing ruin to Western economies. That never happened, for then, as now, contract commitments were met in full. The hard currency income from these exports has been far too important to the national budget to risk damage as an unreliable supplier.

By the mid-1970s, the US position on Soviet oil had been completely reversed, as the United States bought into the belief that the Soviet Union would soon be running out of oil. That belief grew out of the famous, or perhaps infamous, US Central Intelligence Agency (CIA) finding that "during the next decade, the USSR may well find itself not only unable to supply oil to Eastern Europe and the West on the present scale, but also having to compete for OPEC oil for its own use."

The Soviet response was to provide increasing amounts of capital to the oil sector, stimulated, according to some oil watchers at the time, by the CIA report. As a result, Soviet oil production continued to grow, rising from 10.9 million bpd in 1977 to 12.5 million bpd in 1988, the peak year. It was then, however, that additional funding stopped. Moscow simply was in no position to further support the oil sector financially, and the oil collapse was imminent.