Greg's Note: Our Peak Oil correspondent and Outstanding Investments editor Byron King sent us an obituary of an old energy warrior. There are some things you just don't know or suspect. The story of a Russian oilman named Nikolai Baibakov is filled with many such gems. As Byron notes, "This was a man who fueled the Soviet Union and — both directly and indirectly — shaped the modern world." Enjoy, and send any comments to the managing editor here: greg@whiskeyandgunpowder.com Whiskey & Gunpowder
ON A HOT DAY in July 1942 Joseph Stalin summoned before him a young mining engineer named Nikolai Baibakov. The supreme leader of the Soviet Union pointed out an obvious fact to his visitor. German armies were advancing into the Caucasus towards the strategic oil fields near Baku. Then came the dramatic gesture. "You Will Be Shot" Stalin pointed two fingers at Baibakov's head and said, "If you fail to stop the Germans getting our oil, you will be shot." Then Stalin added "And when we have thrown the invader out, if we cannot restart oil production, we will shoot you again." ~~~~~~~~~~~~~~Special~~~~~~~~~~~~~~ You Could Lose Everything Despite all that has already happened, we are expecting at least five more devastating financial shocks in the coming year. When I say we, I'm talking about some of the top experts Wall Street has to offer. In the very near future everything you've worked for could be gone unless you take the necessary precautions. Click here to begin planning for catastrophe… ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ These were desperate times for the USSR, and thus was their tenor. Stalin had his hands full with Hitler's 6th Army in particular, which was advancing on the namesake city of Stalingrad. Striving to avoid a strategic loss of both territory and image, Stalin threw millions of troops into a bloody and epic battle. Still, Stalin was worried. What if Hitler's troops overran Stalingrad and secured their positions to the south in the Caucasus? In that case Stalin entrusted and empowered one man — Baibakov the engineer — with ensuring that the Nazis could not avail themselves of the legendary oil deposits of Baku and environs. He Plugged the Wells and Impressed Stalin Words matter. And Stalin's words mattered more than most. Baibakov was suitably motivated by his visit to the Supreme Leader. Baibakov ordered oilfield workers to pump concrete down the Baku wells to plug the casing. He also ordered workers to remove and hide critical valves from many miles of oil-gathering pipelines. Thus the wells were secure. If the Germans captured Baku, it would require months to drill out the concrete plugs and replace the missing valves. And if the Germans failed in their advance on the oil fields, the Russians could restart production without long-term damage to the reservoirs. Stalin was impressed. In 1943 Baibakov impressed Stalin again. Leningrad (now St. Petersburg) was under siege, and had been for almost two years. Stalin was planning a breakout, but his tanks and other motorized vehicles inside the city needed a lot of fuel. Baibakov came up with the idea of building a pipeline under the ice of Lake Ladoga to bring gasoline to the besieged city. The idea worked. A Man Going Places A man who could impress Stalin was a man who was going places. Thus in 1944 Stalin appointed Baibakov as Peoples' Commissar of the Soviet Union. Baibakov was responsible for the entire national oil industry. This was quite a promotion. The Soviet constitution of 1918 made a Peoples' Commissar (Sovet Narodnykh Komissarov — NarKom ) responsible for the "general administration of the affairs of the state." A NarKom was like a Field Marshall in the realm of politics. While the sound of the voice of a Soviet NarKom did not exactly carry the authority of the "burning bush" of the Bible, in the USSR it came close. The Soviet constitution empowered the NarKom to issue decrees carrying the full force of law when the Soviet congress was not in session. But this was a mere formality, because the Soviet congress routinely approved these NarKom decrees at its next session. Altering the Trajectory of History After the war ended in 1945 Baibakov met with Stalin in a series of conferences that may have altered the trajectory of history. Stalin repeatedly demanded to know what the USSR would do about energy supplies. The country was in a bad state concerning oil. Many Soviet oil fields in western Russia were severely damaged from the fighting. Those that were not damaged by war were showing the effects of long-term depletion. Stalin was concerned. He could not reconstruct the Soviet economy without assured access to large amounts of oil. Energy security was a longstanding concern for Stalin. In 1940, before the war with Germany, Soviet Foreign Minister Molotov made a remarkable demand that stirred the geopolitical pot. Molotov insisted "the area south of Batum and Baku in the general direction of the Persian Gulf be recognized as the center of the aspirations of the Soviet Union." But that "area south" actually had a name. It was the nation of Iran. And Iran's oil industry was closely associated with British interests. Britain was, at the time, at war with Germany, and German bombers were attacking London and sinking British shipping. The British, of course, did not appreciate this direct threat from Molotov to their oil lifelines. But after Germany invaded the USSR on June 21, 1941, Stalin and Molotov had other matters on their plate. ~~~~~~~~~~~~~~Special~~~~~~~~~~~~~~ The Hottest Spot for Venture Capitalism The single largest moneymaking opportunity we can find is ready for your investment. Some of the wealthiest venture capitalists in the world have already shown serious interest in this new hotspot. But what do they know that the rest of Wall Street has yet to discover? Click here to find out before everyone else… ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ By 1946, with the European war over and Japan defeated as well, Stalin massed troops along the southern border of the USSR opposite Iran. Many of the senior commanders were veterans of Soviet advances across Eastern Europe in 1944–1945, and the roll-up of the Japanese Army in Manchuria in August 1945. That is, they knew how to drive tanks and capture territory. Soviet intelligence services actively funded an underground Iranian Communist movement called the Tudeh. If things went from bad to worse with oil supplies, Stalin was considering invading Iran and seizing that nation's oil fields. The Soviet General Staff had invasion plans drawn up. They were waiting for Stalin's word. Baibakov Reassured Stalin But Baibakov reassured Stalin that the vast spaces of the Soviet Union offered immense potential for additional discoveries of oil and gas. Baibakov promised Stalin that he would redouble efforts to locate new reserves of hydrocarbon. And thus Baibakov went on to launch the Soviet Union's postwar oil and natural gas development in Siberia. In typical Stalinist fashion, many oil field personnel from Baku were arrested by the secret police. They were accused and summarily convicted of the "crime" of being relatives of Czarist-era oil barons. Other oil field personnel were accused of espionage or sabotage in support of the Germans during the war. Being too near a rusty pipe that sprang a leak — let alone causing inadvertent damage to an oil production facility — could earn a man a trip to Siberia. Soviet secret police loaded technical personnel like cattle into railcars, with their families, and shipped them to Siberia to start new oil fields. Stalin wanted results. To his credit, Baibakov did not support the "secret police draft" of oil field personnel. Baibakov offered money and other incentives for personnel to relocate to remote areas of the USSR and explore for and produce oil. But however the people arrived in Siberia, Baibakov needed workers. And with the workforce at his disposal, Baibakov delivered results. Under Baibakov, Soviet geologists and engineers discovered vast new oil and gas reserves in eastern Siberia. There was more than Soviet industry could handle. Soviet industry drilled up the largest of the new fields, leapfrogging over medium-sized deposits to locate one giant after another. (Many of those deposits are still being drilled today, in 2008.) And Soviet industry developed remarkable new innovations such as improved seamless drill pipe and down-hole turbo-drilling technology. In character with the culture, many metallurgical and mechanical innovations in the oil industry of the USSR had origins in Soviet research into related military equipment such as artillery tubes or ship and aircraft propulsion systems. Russian oil production almost quadrupled in the late 1940s and into the 1950s. Through it all, Baibakov pushed for massive investment in the hydrocarbon industry. He argued that energy was the backbone of the Soviet Union's planned economy. Indeed, Baibakov was a man who fueled the Soviet Union and — both directly and indirectly — shaped the modern world. The Oil Man and the Head of Secret Police For a time in the early 1950s Lavrenti Beria, head of the Soviet secret police, also had jurisdiction over important industries, including oil. In every national "Five Year Plan" and the annual supplements, Beria granted Baibakov's requests for workers and materials to rebuild the oil industry and expand output from Siberia. If Baibakov needed engineers or architects, welders or electricians, then Beria knew exactly where to find them. These personnel often "volunteered" to move to Siberia and perform their "patriotic duty to the Motherland." Indeed. But the relationship between the oil man and the chief of secret police was delicate. On one occasion Baibakov's wife answered a telephone call from Beria. She told the top cop that her husband could not come to the phone because he had the flu. Beria flew into a rage. He ordered Baibakov's wife to bring her husband to the phone. Then in a paternalistic voice Beria advised Baibakov to wear galoshes to protect his health. Changing to a voice of intimidation, Beria then commanded Baibakov to board an airplane and fly immediately to a distant refinery to oversee a problem. Baibakov did exactly as he was told. Head of Central Planning — For a Time Stalin died in 1953. Nikita Khrushchev took over the Soviet Union. Khrushchev knew Baibakov from the days of the Battle at Stalingrad, where Khrushchev was a senior political officer. In 1955 Khrushchev appointed Baibakov as head of Gosplan, the Soviet central planning agency that set production quotas and investment levels for industry and agriculture. Baibakov's job was to ensure that the Soviet economic system delivered on its economic promises. But Baibakov publicly disagreed with Khrushchev's effort to diminish the reputation of former leader Joseph Stalin, the man who threatened to shoot him back in 1942. In an interview with the BBC in 2006, Baibakov discussed Khrushchev's historic speech in 1956 that denounced Stalin. Baibakov was one of the last surviving witnesses to the speech, delivered at the 20th congress of the Soviet Communist Party. "Maybe there were individual incidents of repression," said Baibakov. "But what Khrushchev denounced Stalin for? That never happened. Khrushchev just said those things to try and give himself more authority as a leader." In 1957, Baibakov's talk led Khrushchev to suspect him of insubordination to the Communist Party hierarchy. So Khrushchev dismissed Baibakov from Gosplan. Baibakov then served in a series of regional and industrial posts for a decade. Head of Central Planning — Again In 1965 Soviet leader Leonid Brezhnev appointed Baibakov to run Gosplan once again. Baibakov served in that position for 20 years. In this job, Baibakov was the chief architect of the planned economy of the USSR. Baibakov and his huge staff used an economic methodology called "input-output analysis." That is, they tried to replace the forces of the free market by using mathematical models to anticipate demand, allocate investment and set production quotas. It is almost beyond question that a centrally planned economic system is inefficient. But a planned economy can still show high rates of economic growth by merely moving from an agrarian economy to an industrial economy. In the case of the post-war USSR, the Russians had to rebuild much of the western region of their nation from economic ruins. During the period of industrializing or rebuilding, it is relatively simple to borrow world-class technology from other industrialized countries and start using it. The USSR was, indeed, a "capital intensive" place for much of its existence. And Baibakov was a champion of capital investment, particularly in energy projects. However as more and more of the work force moved from the farms to the urban centers of the USSR, there was less potential for economic growth based on industrialization alone. Past a basic level of industrialization, future growth in any economy — let alone in the USSR — must depend on innovation. And thus the Soviet Union in the 1960s and 1970s was faced with the need to transition from extensive capital growth to intensive technological growth. That is, the Soviets could not grow their economy based on heavy industry alone. Still, Baibakov and Gosplan worked to boost overall Soviet industrial production. But of many flaws in the planned economy, one proved to be the most serious. Despite all its planning efforts, Gosplan failed to improve Soviet farm output. To his credit, Baibakov often argued that the USSR had to decrease military spending to free up resources for investment in energy and agriculture. But the Russian military-industrial complex insisted on pursuing a massive, long-term conventional and nuclear arms race with the United States. Eventually Soviet central planning was simply inadequate. In the early 1970s Soviet agriculture suffered a series of setbacks and the Kremlin was forced to buy wheat from the United States and Canada. This tacit admission of the failure of basic agriculture under Communism weakened the position of the Soviet Union in the Cold War. By 1985, Soviet leader Mikhail Gorbachev dismissed Baibakov from Gosplan. The Knight of the Planned Economy Still, many Russians have hailed the accomplishments of Baibakov. According to one commentator in the daily Rossiiskaya Gazeta, "The Soviet economy that was formed in the 1960s, 1970s and, partly, the 1980s, was Baibakov's creation." And in the newspaper Izvestia, the director of the Institute of Economy of the Russian Academy of Sciences, said of Baibakov, "He was the knight of the Utopian planned economy." Another letter-writer in Moscow Times blamed the fall of the USSR not on any failure of central planning, but on the Pandora's Box of social and political problems opened by the ill-conceived and poorly-executed war in Afghanistan in the 1980s. In his later years Baibakov was unapologetic for anything. In an interview in 2001 with the Russian newspaper Trud, Baibakov stated that a planned economy was a worthy method by which to organize society. "Figuratively speaking," said Baibakov, "the market and private initiative are the wind in the sail, but the plan and planning are the rudder which guide the ship of the economy to its goal." Baibakov dismissed suggestions that the Soviet economy stagnated in the 1970s and 1980s. In fact he blamed the reforms of Presidents Mikhail Gorbachev and Boris Yeltsin for undermining central planning. The Russian privatization initiatives of the 1990s were ruinous, according to Baibakov. Baibakov's advice to President Vladimir Putin, who was just then succeeding Yeltsin, was to increase the level of central planning in the Russian economy, particularly in the area of energy development. "Now I hope that the situation will change for the better, even if slowly," said Baibakov. "I hope that the role of the state in the economy will grow." Nikolai Baibakov Nikolai Baibakov was born March 2, 1911 in Baku of the Russian Empire, in what is now Azerbaijan. His father was an oilfield worker. Baibakov finished high school in 1928. He graduated from the Azerbaijan Oil & Technical College in 1931 with a degree in mining engineering. Baibakov spent his early years working in the oilfields around Baku. Baibakov was the last living commissar to serve under Stalin. His awards included Hero of Socialist Labor of the USSR. According to an announcement by Russian gas giant Gazprom, Baibakov died of pneumonia on Monday, March 31, 2008 in Moscow. Until we meet again… P.S.: Nikolai Baibakov made great contributions to the field of geology and the oil industry. In my newsletter Energy and Scarcity Investor, I'm constantly looking for the next big innovator or innovation in those fields. To see what I've come up with already, and what I'm currently working on, click here… |
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