helen thompson oil
Abstract There is in much economic and political discourse a strong
belief that there remains a guarantee of rising living standards so long as
policy is correctly set in the circumstances of the new world to achieve
them. Yet any assumption that there must be a way out of the present
economic crisis that returns the West to steady year-on-year growth
punctured only by relatively short recessions is hard to justify. Such a
faith rests on denying even the possibility that the ongoing rise in material
living standards witnessed over the past two centuries is coming to an end,
or indeed that the carrying capacity of the earth may be less than the
material expectations of the world’s sharply rising population. History
suggests such a faith has no foundations in past experience. What happens
to this presumption as the fallout of the multiple problems around oil at
work play out will challenge expectations of democracy and the idea that
time guarantees progress.
The 1970s demonstrated the limits that resource questions ultimately impose on economic possibilities through the cost of energy commodities and the geo-politics of accessing them. The political response to the 1970s crises also exposed the huge difficulties of realising a future-oriented politics of sacrifice that significantly adjusts material expectations to any
recognition of those limits. The eventual move beyond the immediate
economic and political difficulties of the 1970s arose because oil itself
produced a way out. High prices produced new supply and the mutual
interests of the US and Saudi governments allowed the US to reconstruct an
alternative international monetary order around the dollar-oil relationship.
Finding a remedy to the problems of the 1970s in a manner that
allowed a sustained period of largely non-inflationary growth could
not, however, restore the economic and geo-political conditions that
existed before the 1970s crises. Whilst cheap oil returned in the 1980s
and the 1990s most western economies remained reliant on oil from
parts of the world where, as in the Middle East western influence was
diminished, or where, as in Russia, import dependency weakened western
unity. Economically, much of the growth that ensued in a number
of western economies from the mid-1980s became increasingly tied to
credit and asset bubbles and from the late 1990s cross-border banking
flows. When those bubbles were reaching their peak in the mid-2000s,
oil prices began to rise sharply again as non-western demand rose and
supply stagnated at the same time as an American effort to reshape the
Middle East by military intervention failed. In this sense the crisis of
2008 was inescapable and over-determined. An oil crisis and a financial
crisis in which large financial corporations had made themselves hugely
vulnerable to the interruption of short-term capital flows came together
to destroy the reinvented western economic order that had taken shape
from the late 1970s.
In terms of oil itself high prices and the stagnation of conventional oil
supply generated the same response within the oil sector as the oil shocks
of the 1970s had done. The advance of non-conventional oil production
has, however, wrought rather more problems than the rise of North Sea
and Alaskan production furnished. Whilst shale production did not itself
incite monetary change, it has, nonetheless, required the historically extraordinary,
and ultimately pathological, credit environment created by
quantitative easing (QE) and zero interest rates (ZIRP). It has also yielded
a strong counter-reaction from the world’s leading oil-producing state,
which risked declining market share in the face of the new supply at the
same time as its own production looked to be in sight of its peak. In
further depressing oil prices since late 2014 that counter-reaction has
created a deflationary pressure in economies that were already weakened
by weak demand and the exchange rate fallout of QE, and rendered
108 H. THOMPSON
impossible the attempt by the Fed to normalise monetary policy before the
next recession begins.
In a context in which each of these economic problems have enormously
difficult implications, any assumption that there must be a way out
of the present crisis that returns the West to steady year-on-year growth
punctured only by relatively short recessions is hard to justify, as Mervyn
King in good part recognised when he pronounced the end of NICE.
Nonetheless, there is in much economic and political discourse a strong
belief that there remains a guarantee of rising living standards so long as
policy is correctly set in the circumstances of the new world to achieve
them. This hope is particularly evident in recent arguments that western
economies can prosper again if they remedy secular stagnation. In this vein
Larry Summers (2016), for example, begins from the intrinsically plausible
claim that both the poor performance of western economies since 2009
and the non-inflationary consequences of QE and ZIRP require significant
explanation only to find a relatively easy solution to poor growth in
internationally co-ordinated fiscal expansion and reduced savings to
address deficient demand, supported if necessary by negative interest
rates. Yet the economic problems now at issue for western states when
there is no possible equilibrium price of oil are clearly not only a matter of
consumer and investment demand, and the consequences of the existing
credit environment around QE and ZIRP are already palpably deleterious,
even without the lethal way they have interacted since mid-2014 with
falling oil prices.
Of course, unqualified fatalism about the future also distorts the picture
of western economies over the past decade. Quite clearly, the different
monetary responses of the Fed and the Bank of England on one side and
the ECB on the other to the problem of rising oil prices in 2011 yielded
an acutely consequential divergence of outcomes. The amount of the
short- to medium-term harm that monetary policy-makers have inflicted
on growth prospects, whatever the long-term deleterious consequences of
QE and ZIRP, has been differential. The individual euro zone states are
also, as Streeck (2014, 182–84) has argued, at a very considerable disadvantage
in macro-economic decision-making in having eliminated
national currency devaluation as a possible policy instrument in times of
economic crisis. If it renders nothing else, national monetary sovereignty
does provide a means of reconfiguring the balance of political winners and
losers at any particular time in ways that can be responsive to national
democratic politics. Nonetheless, any presumption that solutions must exist
CONCLUSIONS 109
to the fundamental problems now at work if only they are steadfastly
pursued either ignores the depth of the unintended consequences of the
responses made to the 2008 crisis hitherto, or requires immense confidence
that the pre-2008 monetary environment can be restored and oil
consumption can be rapidly reduced. Put differently, this faith rests on
denying even the possibility that the ongoing rise in material living standards
witnessed over the past two centuries is coming to an end, or indeed
that the carrying capacity of the earth may be less than the material
expectations of the world’s sharply rising population.
History suggests such a faith has no foundations in past experience. The
micro history of the fossil-fuel age in the West is far from one of continual
growth or even steady-state growth during the periods of expansion.
Periodic crises of one kind or another have been an ongoing feature of
Western economies since the early nineteenth century. The post-
Napoleonic war depression in Britain lasted for around a decade, and the
British economy grew significantly more slowly from the 1870s to the
First World War than it had in the previous four decades. As Robert
Gordon (2016, ix) has shown American growth has ‘varied systematically
over time’, reaching a peak in 1970 that it has not matched since. These
economic crises have also long had profound political consequences. Just
as the political turbulence of the 1930s followed the 1929 economic crash,
the European revolutions of 1848 came after several years of massive crop
failure that produced a shortage of food. These problems have always
elicited deep fears about the sustainability of industrial economies and
the huge increase in populations they have made possible. Retrospectively
the nineteenth century might look like a time of successful economic
transformation, but for at least the first half of the century ‘no one
knew’, as Robert Tombs (2015, 453) has said, ‘whether [industrialisation]
would end in wider prosperity or mass starvation’. That it ended in the
former has a historically specific explanation, which includes the economic
and geo-political turbulence that eventually led to the catastrophe of the
First World War.
Looked at from such a historical perspective, the period between the end
of the SecondWorld War and the early 1970s appears dependent on a set of
exhausted geo-political contingencies around oil. With the US’ massive oil
capacity having allowed the Allies to pursue the unconditional surrender of
Germany and Japan, the US could after the war absorb these two large oil
consuming states into its security orbit and take responsibility for ensuring
those states’ access to oil in an environment in which, as a consequence of
110 H. THOMPSON
the war, the Soviet Union was temporarily removed as a significant oil
producer. Now the US has nothing like the power it had in the post-war
period in providing other states access to oil. Shale oil has proved consequential,
not least in disrupting the incentives facing conventional
producers. But it cannot change the fact that the largest reserves of
cheaply accessible oil lie in the Middle East and Russia, or that China
and others’ rise has fundamentally changed the volume of demand for oil
in the world. In the thermonuclear age in which there is once again a
rising power with independent energy interests there has to be accommodation
not war. This reality will almost certainly entail western governments
having to accept an increasingly co-operative relationship
between Russia and China, and it will put significant pressure on the
West’s internal unity in dealing with Russia, particularly in regard to the
conflicting interests of Germany and the US. Neither China nor
Germany will repeat Nazi Germany’s attempted conquest of the Soviet
Union to procure oil, but neither can either allow its relations with
Russia to be significantly circumscribed by the US.
For its part the disappearance of the post-war international monetary
order did create opportunities to deal with some of the economic problems
at work by the 1970s. Under conditions of open capital flows and
without a fixed exchange rate system anchored by a currency convertible
to gold, credit can be accessed and created much more readily than was the
case during the Bretton Woods years. Easily available debt made it possible
for households to maintain consumer demand even as real wages stagnated
or fell, and it also allowed governments to maintain spending
commitments without raising sufficient taxes to pay for them as they had
done during the post-war era. The shift, however, from high debt to high
debt sustained by QE and ZIRP has taken western states into unprecedented
territory that would appear, among other outcomes, to replace the
entire price discovery foundations of financial markets with signifiers
generated by central banks. There is no way of knowing from historical
experience what the likely consequences of this transformation will be, or
whether it is remotely sustainable for any length of time. More clearly, the
geo-political underpinnings of the post-Bretton Woods monetary order in
which this new Fed-led monetary environment emerged are badly fraying.
For several decades oil has acted via the US-Saudi relationship as the
effective anchor of the dollar’s credibility as the world’s premier currency.
But oil cannot permanently perform this role for the dollar when the need
for non-conventional oil production divides American and Saudi interests
CONCLUSIONS 111
and all of Russia, China and Iran have strong incentives to see the dollar
supplanted in oil transactions.
Under these conditions any presumption that economic problems can
ultimately always be addressed is likely to be tested to destruction over the
next few decades. What happens to this presumption as the fallout of the
multiple problems around oil at work play out will also challenge expectations
of democracy. From its eighteenth century origins representative
democracy became tied to the Enlightenment idea of progress. Even
though the first idea of democracy came from a time in which time was
seen cyclically and all forms of government were perceived as subject to
inevitable decay, much rhetoric around representative democracy made the
realisation of modern democracy an act guided and blessed by historical
providence in which time proved its superiority over alternative arrangements
of governance, (Dunn 1993, 2006). Citizens and governments may
be persistently allayed with fear about democracy’s performance, but it
succeeds over time, its proponents argue, because democratic citizens somewhere
retain faith in the better future it can create (Runciman 2013).
Whether it was ever plausible to expect so much from representative
democracy, or indeed any form of the rule of human beings over human
beings, is very much open to question. The historical success of representative
democracy in western Europe and North America mirrors the
economic progress made by fossil-fuel civilisation, as do its crisis periods
in the twentieth and twenty-first centuries correspond with acute geopolitical
or economic problems at least in part generated in one way or
another by resources. The end of the crises of the 1930s and 1970s are not
obviously the result of western democracies’ experimentation creating a
new path forward to the future. War production resurrected western
economies in the 1930s, first and foremost the American, not least by
significantly increasing labour productivity (Gordon 2016, 18–19, 564).
Similarly, it was not the adaptability of democratic citizens or the responsiveness
of democratic elites to citizens’ preferences that rendered profitable
oil discovered in the North Sea and Alaska or covertly reconfigured
the US relationship with Saudi Arabia to remake the international monetary
order in the 1970s. Taking advantage of high oil prices to make
geologically difficult oil production viable and renewing alliances around
energy needs and their financial corollaries is what modern states with
economies dependent on resource consumption under any form of government
seek to do. Certainly, democratic societies like that in the US may
well do better in creating the kind of technological innovation utilised in
112 H. THOMPSON
the shale boom than those ruled over by authoritarian states. But democracy
cannot stay the geological limits of shale production or alter the credit
requirements they engender. Moreover, the predicaments that now confront
democratic governments around oil are significantly more difficult
than those they faced in the twentieth century before conventional oil
production stagnated. Since there can be no return to an oil price that is
sustainable in relation to the economic capacity and political power of netconsuming
and net-producing states, managing oil and its fallout has
become a permanent economic and political problem, with the capacity
to engender economic and geo-political crises at any time in a near
dystopian-looking monetary world.
Nonetheless, if the stagnation of conventional oil production around
the middle of the last decade has yielded immense predicaments for
western democracies to navigate we should, not be surprised. For several
centuries the material viability of human life as lived in western societies
has depended on access to energy sources created millions of years before
human life began. It is a supreme irony that the concept of progress with
its near metaphysical inflation of human agency to providential status has
been sustained through a time of vastly increased material living standards
that was made possible by the geological storage of ancient sunlight.
Many hope that human ingenuity will provide an escape from the
possibility that the West’s material progress is ultimately bound by limits
dictated by that energy supply, whether those limits arise from its physical
production or the disruption to the biosphere of burning it.
However, whether this hope is plausible or not, the economic and geopolitical
world that oil dependency has hitherto made cannot be undone,
and its consequences will endure across the spheres of collective life for
many years to come.
The 1970s demonstrated the limits that resource questions ultimately impose on economic possibilities through the cost of energy commodities and the geo-politics of accessing them. The political response to the 1970s crises also exposed the huge difficulties of realising a future-oriented politics of sacrifice that significantly adjusts material expectations to any
recognition of those limits. The eventual move beyond the immediate
economic and political difficulties of the 1970s arose because oil itself
produced a way out. High prices produced new supply and the mutual
interests of the US and Saudi governments allowed the US to reconstruct an
alternative international monetary order around the dollar-oil relationship.
Finding a remedy to the problems of the 1970s in a manner that
allowed a sustained period of largely non-inflationary growth could
not, however, restore the economic and geo-political conditions that
existed before the 1970s crises. Whilst cheap oil returned in the 1980s
and the 1990s most western economies remained reliant on oil from
parts of the world where, as in the Middle East western influence was
diminished, or where, as in Russia, import dependency weakened western
unity. Economically, much of the growth that ensued in a number
of western economies from the mid-1980s became increasingly tied to
credit and asset bubbles and from the late 1990s cross-border banking
flows. When those bubbles were reaching their peak in the mid-2000s,
oil prices began to rise sharply again as non-western demand rose and
supply stagnated at the same time as an American effort to reshape the
Middle East by military intervention failed. In this sense the crisis of
2008 was inescapable and over-determined. An oil crisis and a financial
crisis in which large financial corporations had made themselves hugely
vulnerable to the interruption of short-term capital flows came together
to destroy the reinvented western economic order that had taken shape
from the late 1970s.
In terms of oil itself high prices and the stagnation of conventional oil
supply generated the same response within the oil sector as the oil shocks
of the 1970s had done. The advance of non-conventional oil production
has, however, wrought rather more problems than the rise of North Sea
and Alaskan production furnished. Whilst shale production did not itself
incite monetary change, it has, nonetheless, required the historically extraordinary,
and ultimately pathological, credit environment created by
quantitative easing (QE) and zero interest rates (ZIRP). It has also yielded
a strong counter-reaction from the world’s leading oil-producing state,
which risked declining market share in the face of the new supply at the
same time as its own production looked to be in sight of its peak. In
further depressing oil prices since late 2014 that counter-reaction has
created a deflationary pressure in economies that were already weakened
by weak demand and the exchange rate fallout of QE, and rendered
108 H. THOMPSON
impossible the attempt by the Fed to normalise monetary policy before the
next recession begins.
In a context in which each of these economic problems have enormously
difficult implications, any assumption that there must be a way out
of the present crisis that returns the West to steady year-on-year growth
punctured only by relatively short recessions is hard to justify, as Mervyn
King in good part recognised when he pronounced the end of NICE.
Nonetheless, there is in much economic and political discourse a strong
belief that there remains a guarantee of rising living standards so long as
policy is correctly set in the circumstances of the new world to achieve
them. This hope is particularly evident in recent arguments that western
economies can prosper again if they remedy secular stagnation. In this vein
Larry Summers (2016), for example, begins from the intrinsically plausible
claim that both the poor performance of western economies since 2009
and the non-inflationary consequences of QE and ZIRP require significant
explanation only to find a relatively easy solution to poor growth in
internationally co-ordinated fiscal expansion and reduced savings to
address deficient demand, supported if necessary by negative interest
rates. Yet the economic problems now at issue for western states when
there is no possible equilibrium price of oil are clearly not only a matter of
consumer and investment demand, and the consequences of the existing
credit environment around QE and ZIRP are already palpably deleterious,
even without the lethal way they have interacted since mid-2014 with
falling oil prices.
Of course, unqualified fatalism about the future also distorts the picture
of western economies over the past decade. Quite clearly, the different
monetary responses of the Fed and the Bank of England on one side and
the ECB on the other to the problem of rising oil prices in 2011 yielded
an acutely consequential divergence of outcomes. The amount of the
short- to medium-term harm that monetary policy-makers have inflicted
on growth prospects, whatever the long-term deleterious consequences of
QE and ZIRP, has been differential. The individual euro zone states are
also, as Streeck (2014, 182–84) has argued, at a very considerable disadvantage
in macro-economic decision-making in having eliminated
national currency devaluation as a possible policy instrument in times of
economic crisis. If it renders nothing else, national monetary sovereignty
does provide a means of reconfiguring the balance of political winners and
losers at any particular time in ways that can be responsive to national
democratic politics. Nonetheless, any presumption that solutions must exist
CONCLUSIONS 109
to the fundamental problems now at work if only they are steadfastly
pursued either ignores the depth of the unintended consequences of the
responses made to the 2008 crisis hitherto, or requires immense confidence
that the pre-2008 monetary environment can be restored and oil
consumption can be rapidly reduced. Put differently, this faith rests on
denying even the possibility that the ongoing rise in material living standards
witnessed over the past two centuries is coming to an end, or indeed
that the carrying capacity of the earth may be less than the material
expectations of the world’s sharply rising population.
History suggests such a faith has no foundations in past experience. The
micro history of the fossil-fuel age in the West is far from one of continual
growth or even steady-state growth during the periods of expansion.
Periodic crises of one kind or another have been an ongoing feature of
Western economies since the early nineteenth century. The post-
Napoleonic war depression in Britain lasted for around a decade, and the
British economy grew significantly more slowly from the 1870s to the
First World War than it had in the previous four decades. As Robert
Gordon (2016, ix) has shown American growth has ‘varied systematically
over time’, reaching a peak in 1970 that it has not matched since. These
economic crises have also long had profound political consequences. Just
as the political turbulence of the 1930s followed the 1929 economic crash,
the European revolutions of 1848 came after several years of massive crop
failure that produced a shortage of food. These problems have always
elicited deep fears about the sustainability of industrial economies and
the huge increase in populations they have made possible. Retrospectively
the nineteenth century might look like a time of successful economic
transformation, but for at least the first half of the century ‘no one
knew’, as Robert Tombs (2015, 453) has said, ‘whether [industrialisation]
would end in wider prosperity or mass starvation’. That it ended in the
former has a historically specific explanation, which includes the economic
and geo-political turbulence that eventually led to the catastrophe of the
First World War.
Looked at from such a historical perspective, the period between the end
of the SecondWorld War and the early 1970s appears dependent on a set of
exhausted geo-political contingencies around oil. With the US’ massive oil
capacity having allowed the Allies to pursue the unconditional surrender of
Germany and Japan, the US could after the war absorb these two large oil
consuming states into its security orbit and take responsibility for ensuring
those states’ access to oil in an environment in which, as a consequence of
110 H. THOMPSON
the war, the Soviet Union was temporarily removed as a significant oil
producer. Now the US has nothing like the power it had in the post-war
period in providing other states access to oil. Shale oil has proved consequential,
not least in disrupting the incentives facing conventional
producers. But it cannot change the fact that the largest reserves of
cheaply accessible oil lie in the Middle East and Russia, or that China
and others’ rise has fundamentally changed the volume of demand for oil
in the world. In the thermonuclear age in which there is once again a
rising power with independent energy interests there has to be accommodation
not war. This reality will almost certainly entail western governments
having to accept an increasingly co-operative relationship
between Russia and China, and it will put significant pressure on the
West’s internal unity in dealing with Russia, particularly in regard to the
conflicting interests of Germany and the US. Neither China nor
Germany will repeat Nazi Germany’s attempted conquest of the Soviet
Union to procure oil, but neither can either allow its relations with
Russia to be significantly circumscribed by the US.
For its part the disappearance of the post-war international monetary
order did create opportunities to deal with some of the economic problems
at work by the 1970s. Under conditions of open capital flows and
without a fixed exchange rate system anchored by a currency convertible
to gold, credit can be accessed and created much more readily than was the
case during the Bretton Woods years. Easily available debt made it possible
for households to maintain consumer demand even as real wages stagnated
or fell, and it also allowed governments to maintain spending
commitments without raising sufficient taxes to pay for them as they had
done during the post-war era. The shift, however, from high debt to high
debt sustained by QE and ZIRP has taken western states into unprecedented
territory that would appear, among other outcomes, to replace the
entire price discovery foundations of financial markets with signifiers
generated by central banks. There is no way of knowing from historical
experience what the likely consequences of this transformation will be, or
whether it is remotely sustainable for any length of time. More clearly, the
geo-political underpinnings of the post-Bretton Woods monetary order in
which this new Fed-led monetary environment emerged are badly fraying.
For several decades oil has acted via the US-Saudi relationship as the
effective anchor of the dollar’s credibility as the world’s premier currency.
But oil cannot permanently perform this role for the dollar when the need
for non-conventional oil production divides American and Saudi interests
CONCLUSIONS 111
and all of Russia, China and Iran have strong incentives to see the dollar
supplanted in oil transactions.
Under these conditions any presumption that economic problems can
ultimately always be addressed is likely to be tested to destruction over the
next few decades. What happens to this presumption as the fallout of the
multiple problems around oil at work play out will also challenge expectations
of democracy. From its eighteenth century origins representative
democracy became tied to the Enlightenment idea of progress. Even
though the first idea of democracy came from a time in which time was
seen cyclically and all forms of government were perceived as subject to
inevitable decay, much rhetoric around representative democracy made the
realisation of modern democracy an act guided and blessed by historical
providence in which time proved its superiority over alternative arrangements
of governance, (Dunn 1993, 2006). Citizens and governments may
be persistently allayed with fear about democracy’s performance, but it
succeeds over time, its proponents argue, because democratic citizens somewhere
retain faith in the better future it can create (Runciman 2013).
Whether it was ever plausible to expect so much from representative
democracy, or indeed any form of the rule of human beings over human
beings, is very much open to question. The historical success of representative
democracy in western Europe and North America mirrors the
economic progress made by fossil-fuel civilisation, as do its crisis periods
in the twentieth and twenty-first centuries correspond with acute geopolitical
or economic problems at least in part generated in one way or
another by resources. The end of the crises of the 1930s and 1970s are not
obviously the result of western democracies’ experimentation creating a
new path forward to the future. War production resurrected western
economies in the 1930s, first and foremost the American, not least by
significantly increasing labour productivity (Gordon 2016, 18–19, 564).
Similarly, it was not the adaptability of democratic citizens or the responsiveness
of democratic elites to citizens’ preferences that rendered profitable
oil discovered in the North Sea and Alaska or covertly reconfigured
the US relationship with Saudi Arabia to remake the international monetary
order in the 1970s. Taking advantage of high oil prices to make
geologically difficult oil production viable and renewing alliances around
energy needs and their financial corollaries is what modern states with
economies dependent on resource consumption under any form of government
seek to do. Certainly, democratic societies like that in the US may
well do better in creating the kind of technological innovation utilised in
112 H. THOMPSON
the shale boom than those ruled over by authoritarian states. But democracy
cannot stay the geological limits of shale production or alter the credit
requirements they engender. Moreover, the predicaments that now confront
democratic governments around oil are significantly more difficult
than those they faced in the twentieth century before conventional oil
production stagnated. Since there can be no return to an oil price that is
sustainable in relation to the economic capacity and political power of netconsuming
and net-producing states, managing oil and its fallout has
become a permanent economic and political problem, with the capacity
to engender economic and geo-political crises at any time in a near
dystopian-looking monetary world.
Nonetheless, if the stagnation of conventional oil production around
the middle of the last decade has yielded immense predicaments for
western democracies to navigate we should, not be surprised. For several
centuries the material viability of human life as lived in western societies
has depended on access to energy sources created millions of years before
human life began. It is a supreme irony that the concept of progress with
its near metaphysical inflation of human agency to providential status has
been sustained through a time of vastly increased material living standards
that was made possible by the geological storage of ancient sunlight.
Many hope that human ingenuity will provide an escape from the
possibility that the West’s material progress is ultimately bound by limits
dictated by that energy supply, whether those limits arise from its physical
production or the disruption to the biosphere of burning it.
However, whether this hope is plausible or not, the economic and geopolitical
world that oil dependency has hitherto made cannot be undone,
and its consequences will endure across the spheres of collective life for
many years to come.
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