helen thompson politics of oil
Over the past eight years I have written about different aspects of the
economic crisis that has unfolded in the West since 2008. For much of
that time I thought little about oil’s relationship to the crisis even though I
was strongly conscious of the massive rise in oil prices that took place from
2002 to mid-2008. But the harder I tried to think through the idea of
writing a book that captured the extraordinary nature of the post-2008
economic and political world, I found myself coming back on issue after
issue to oil. At first I thought it would be possible to add oil into an
analysis of the origins and aftermath of the 2008 crisis only to realise that
actually there is a story to tell about oil that can explain a significant part of
the end of the pre-2008 world and something about the nature of the one
western economies and states now inhabit. The more I reflected on that
story the more I saw parallels between the economic and political crises of
the 1970s and today’s economic and political predicaments even as the
monetary landscape has been transformed beyond recognition. This book
is the result of that intellectual journey in which I have endeavoured to put
the present western economic crisis in its apposite historical context.
As with any book I have incurred debts. Tony Payne gave me the
opportunity to turn what was a set of emerging thoughts into a book
and did so with an enthusiasm that overtook what would otherwise have
been my caution. Colin Hay encouraged me when I first mentioned to
him that I thought that oil was much more important to the 2008 crisis
than most scholars and commentators allowed. Amber Husain and
Christina Brian at Palgrave have been very helpful. Josh Simons provided
me with excellent research assistance in collecting material on quantitative
vii
easing, the financial problems of the shale oil sector, and commodity
prices. He also offered acute insight in conversation on these subjects
and others. Christopher Hill and Glen Rangwala gave me some guidance
on the issue of US and EU sanctions against Iran. Matt King at Citigroup
engaged with me with extreme generosity and analytical sharpness on the
post-2008 monetary and financial environment. I have learned a great deal
from him, and my understanding of the post-2008 monetary and financial
world would be significantly diminished if I did not know him.
My debt to my late friend Geoff Hawthorn is long-lasting. In the
penultimate conversation I enjoyed with him I articulated the main argument of this book for the first time. As I have set that argument to the
written word, I have been strengthened by the memory of Geoff’s lifelong
intellectual bravery in venturing into new subjects in the faith that one has
to try to get better and better at understanding the world and that our old
ways of thinking never suffice. Without his example I would not have got
here.
Abstract For the best part of a century oil has been the material basis of western economic life. Given its huge economic importance, oil is inescapably part of politics. Yet from its onset the subject of political economy has been curiously lacking in perspectives that engage seriously with energy as an economic and political predicament. Today with a few striking exceptions oil has had a very limited place in macro-analysis of the pathologies at work in the present political economy of the West. This absence makes little empirical sense once we take a look at the visible economic and political world we have inhabited since the turn of the century. This book aspires to tell the story of the western economic crisis that has developed since then through the lens of oil and in doing so connect the present set of economic and political predicaments facing western countries to the older crises of the 1970s.
For the best part of a century oil has been the material basis of western economic life. It is the single largest source of the world’s energy supply, and more than 90 per cent of the energy used in transportation still comes from oil-based fuels, a proportion that has changed little since the1970s energy crisis (International Energy Agency (IEA) 2013, 510). Now the threat from climate change has created acute incentives to reduce the use of oil, but at present most renewable energy generation is directed at replacing coal in the production of electricity rather than oil in the transportation sector. Given its huge economic importance, oil is inescapably part of politics. As a limited resource unevenly distributed across the world, oil generates international conflicts of interests between states. In a world in which military power came to rest on oil-fuelled ships, submarines, tanks, and aeroplanes, access to oil fields was fundamental to the geo-political formation of the West in the twentieth century. It in good part explains the rise of the oil-rich United States (US), the ongoing relative military power in the first half of the century of an economically declining Britain that had access to oil in the Middle East, and the problems posed to the international order of an economically rising Germany that did not. As Britain’s Secretary of State for the Colonies told the House of Common in 1917, ‘you may have men, munitions and money that you use, but if you do not have oil, which is today the greatest motive power that you use, all your other advantages would be of comparatively little value’ (Quoted in Yergin 1992, 177). Nothing made the geo-political potency of oil clearer than the Second World War. In the age of air power, the ultimate alliance of the world’s two largest oil producers in the US and the Soviet Union against two states in Germany and Japan lacking any domestically-generated oil ensured one eventual outcome. Germany’s only conceivable chance of winning the war was to capture the Soviet oil fields in Baku on the Caspian Sea and protect the oil it controlled in Romania once it chose to end the Nazi-Soviet pact. Yet Germany could not succeed in taking that chance because the German army simply did not have enough fuel either to capture Baku or defend itself at Stalingrad. Oil also generates acute domestic political problems for states. Oil prices have a large impact on economic growth. Of the recessions that occurred in the US between 1945 and 1982 all but one was preceded by a sharp rise in the price of oil (Hamilton 1983). Since then all three American recessions – 1990–91, 2001, and 2007–09 – came after a substantial oil price shock (Kilian and Vigfusson 2014). The oligopolistic tendencies of the oil sector and the difficulties in securing any kind of equilibrium price between the interests of consumers and producers when conditions of both relative scarcity and over-supply can abruptly materialise also create severe domestic distributional conflicts in countries where there is significant oil production or which are home to international oil 2 H. THOMPSON companies. These conditions often allow oil companies the opportunity to exercise significant political influence and can give voters reasons to become suspicious that a political-business elite is price fixing and getting rich on foreign wars. Yet from its onset the subject of political economy has been curiously lacking in perspectives that engage seriously with energy as an economic and political predicament. The first political economists, like Adam Smith, treated energy as a free and unproblematic good, supposing that there could be a calculus of economic gain independently of the energy required to transport goods across land and sea or the political power required to keep those trading routes open. Whilst there were economists, especially in the US, in the early twentieth century who made questions of natural resources their fundamental subject matter, they lost the disciplinary argument to both neo-classical and Keynesian scholars who largely ignored them (Mitchell 2013, 131–32). For his part Keynes made aggregate demand the centrepiece of his analytical political economy without any explicit regard for either the impact of energy prices on that demand or the possible impact of geo-political shocks on energy prices, wellattuned as he otherwise was to the power dynamics of international politics. The Keynesians, who in part followed him, were then predictably flummoxed when the oil price shocks of the 1970s generated a simultaneous increase in unemployment and inflation, leaving their models of how western economies worked largely irrelevant in the face of the changing balance of power in oil production and the international monetary fallout. Undoubtedly oil in part has made an analytical reappearance in recent years. There has been considerable discussion of the causes of the recent rise and fall of prices (Hamilton 2009; Lutz and Murphy 2014) and the financialisation of oil markets (Gkanoutas-Leventis and Nesvetailova 2015; Kaufmann and Ullman 2009). US foreign policy scholars and commentators have also explored the geo-political impact of oil (Morse and Richard 2002; Bromley 2008; Yergin 2012; Blackwill and O’Sullivan 2014). Yet with a few striking exceptions (Hay 2011; DiMuzio 2012; Mitchell 2013) oil has had a very limited place in macro-analysis of the pathologies at work in the present political economy of the West. The discourse of crisis rightly deployed in political economy scholarship since 2008 has focused on one or more of debt (Gamble 2014; Streeck 2014), the ideological victory of neo-liberalism (Blyth 2013; Crouch 2011; Gamble 2014; Streeck 2014), technological and demographic change INTRODUCTION 3 (Gamble 2014; Summers 2016), and productivity (Gordon 2016). Strikingly, even those who have extremely insightfully placed the contemporary western economic crisis in a longer temporal crisis going back to the 1970s (Gamble 2014; Streeck 2014) have said rather little about oil in macro-economic and geo-political terms, despite the fact that the two oil price shocks are routinely described in virtually all accounts of the crisis of the 1970s. The relative absence of oil in the macro historiography of the western economic crisis compared either to ideational or other material factors makes little conceptual sense once we acknowledge oil’s place in the underlying material basis of western civilisation without which ideological politics as we know it would not exist. It also makes little empirical sense once we take a look at the visible economic and political world we have inhabited since the turn of the century. Quite conspicuously, the 2008 crash was preceded by a third oil price shock that saw prices reach around $150 a barrel in June 2008, 30 per higher in constant prices than the last peak they reached in 1980. The post-crisis world, meanwhile, has seen a transformation in oil production that has led to a resurgence of American oil production and the world’s largest holder of oil reserves to declare war on the shale industry, throwing into tumult the geo-political axis that has largely guaranteed western oil interests for the past four decades. Both before and after 2008 oil has posed massive problems for central banks and confronted the West with geo-political predicaments from the Middle East to Russia. Without a narrative that gives oil predicaments and their consequences substantial explanatory weight it is impossible to understand the macro-economic landscape and geo-political world that western states now inhabit. This book aspires to tell the story of the western economic crisis through the lens of oil and in doing so connect the present set of economic and political predicaments facing western countries to the older crises of the 1970s. It argues that the stagnation of conventional oil production around 2005 and the rise of non-conventional oil as a response to that material reality has created a Gordian knot of macro-economic and geo-political problems, the fallout of which pose a fundamental challenge to the assumption of progress embedded in western expectations of democracy. Whether or not oil will be eliminated as an energy source in the future in a revolution of solar power and battery technology, as promised by entrepreneurs like Elon Musk, the problems generated by oil as the world’s present premier energy source have had a profound 4 H. THOMPSON impact in shaping today’s economic and political predicaments and their legacy will remain for the foreseeable future. (Given the laws of thermodynamics and the enormous federal and state subsidies that Musk’s lossmaking companies consume there is also little reason to think that an alternative future will arise with any alacrity.) In reflecting upon the place of oil in the west’s present economic and political problems, I will not engage with the issue of climate change. This omission is not because I in any way wish to minimise the threat that rising carbon emissions pose to the sustainability of human life on this planet. Rather, it stems from the recognition that since the world now consumes 28 million more barrels of petroleum every day than it did in 1992 when the representatives of 166 states signed the United Nations Framework Convention on Climate Change climate change concerns have thus far not made oil less important to western economic life or mitigated the problems oil has generated (US EIA 2016a, 2016b). Explaining the reasons for that failure and the likely consequences of it that would be a different book. Neither do I wish to suggest that oil dependency has only generated problems for the West. Indeed, a significant part of the rise of oil consumption since the early 1990s has occurred in non-western countries, not least in China leaving the Chinese economy vulnerable too to oil shocks. I concentrate in this book on oil as an economic and political problem for western states alone because its role in the crisis afflicting western economies since 2008 has largely been erroneously ignored. The book begins with the problems oil created for western states in the decade leading up to the 2008 economic crash. Chapter one explains how the stagnation of conventional oil production under the weight of both geological and political pressures at time when the demand for oil from China and India was increasing substantially produced an extremely sharp rise in oil prices. It argues that this oil price shock created a spectre of the return of the stagflation of the 1970s and set in motion the recessions that marked the macro-economic side of the 2008 crash. The second chapter considers the rise in supply of non-conventional oil as a response to the pre-crash oil price hike. It shows how the American shale boom was dependent on the monetary environment created by quantitative easing and zero interest rates and all that has come with them, including the perversion of financial markets since 2008. It also explains how US shale production produced a counter action from conventional oil producers, and analyses how the consequences of this reaction, which included a sharp fall in oil prices from the middle of 2014, have produced huge INTRODUCTION 5 monetary problems for central banks and destabilised the US relationship with Saudi Arabia. The third chapter reconsiders these macro-economic and geo-political problems in light of the oil crises of the 1970s and argues that the underlying causes of these crises have returned over the past decade in a more lethal form. The final chapter draws some conclusions about the implications for western democracies and the presumption in western politics that time ultimately guarantees progress.
Abstract For the best part of a century oil has been the material basis of western economic life. Given its huge economic importance, oil is inescapably part of politics. Yet from its onset the subject of political economy has been curiously lacking in perspectives that engage seriously with energy as an economic and political predicament. Today with a few striking exceptions oil has had a very limited place in macro-analysis of the pathologies at work in the present political economy of the West. This absence makes little empirical sense once we take a look at the visible economic and political world we have inhabited since the turn of the century. This book aspires to tell the story of the western economic crisis that has developed since then through the lens of oil and in doing so connect the present set of economic and political predicaments facing western countries to the older crises of the 1970s.
For the best part of a century oil has been the material basis of western economic life. It is the single largest source of the world’s energy supply, and more than 90 per cent of the energy used in transportation still comes from oil-based fuels, a proportion that has changed little since the1970s energy crisis (International Energy Agency (IEA) 2013, 510). Now the threat from climate change has created acute incentives to reduce the use of oil, but at present most renewable energy generation is directed at replacing coal in the production of electricity rather than oil in the transportation sector. Given its huge economic importance, oil is inescapably part of politics. As a limited resource unevenly distributed across the world, oil generates international conflicts of interests between states. In a world in which military power came to rest on oil-fuelled ships, submarines, tanks, and aeroplanes, access to oil fields was fundamental to the geo-political formation of the West in the twentieth century. It in good part explains the rise of the oil-rich United States (US), the ongoing relative military power in the first half of the century of an economically declining Britain that had access to oil in the Middle East, and the problems posed to the international order of an economically rising Germany that did not. As Britain’s Secretary of State for the Colonies told the House of Common in 1917, ‘you may have men, munitions and money that you use, but if you do not have oil, which is today the greatest motive power that you use, all your other advantages would be of comparatively little value’ (Quoted in Yergin 1992, 177). Nothing made the geo-political potency of oil clearer than the Second World War. In the age of air power, the ultimate alliance of the world’s two largest oil producers in the US and the Soviet Union against two states in Germany and Japan lacking any domestically-generated oil ensured one eventual outcome. Germany’s only conceivable chance of winning the war was to capture the Soviet oil fields in Baku on the Caspian Sea and protect the oil it controlled in Romania once it chose to end the Nazi-Soviet pact. Yet Germany could not succeed in taking that chance because the German army simply did not have enough fuel either to capture Baku or defend itself at Stalingrad. Oil also generates acute domestic political problems for states. Oil prices have a large impact on economic growth. Of the recessions that occurred in the US between 1945 and 1982 all but one was preceded by a sharp rise in the price of oil (Hamilton 1983). Since then all three American recessions – 1990–91, 2001, and 2007–09 – came after a substantial oil price shock (Kilian and Vigfusson 2014). The oligopolistic tendencies of the oil sector and the difficulties in securing any kind of equilibrium price between the interests of consumers and producers when conditions of both relative scarcity and over-supply can abruptly materialise also create severe domestic distributional conflicts in countries where there is significant oil production or which are home to international oil 2 H. THOMPSON companies. These conditions often allow oil companies the opportunity to exercise significant political influence and can give voters reasons to become suspicious that a political-business elite is price fixing and getting rich on foreign wars. Yet from its onset the subject of political economy has been curiously lacking in perspectives that engage seriously with energy as an economic and political predicament. The first political economists, like Adam Smith, treated energy as a free and unproblematic good, supposing that there could be a calculus of economic gain independently of the energy required to transport goods across land and sea or the political power required to keep those trading routes open. Whilst there were economists, especially in the US, in the early twentieth century who made questions of natural resources their fundamental subject matter, they lost the disciplinary argument to both neo-classical and Keynesian scholars who largely ignored them (Mitchell 2013, 131–32). For his part Keynes made aggregate demand the centrepiece of his analytical political economy without any explicit regard for either the impact of energy prices on that demand or the possible impact of geo-political shocks on energy prices, wellattuned as he otherwise was to the power dynamics of international politics. The Keynesians, who in part followed him, were then predictably flummoxed when the oil price shocks of the 1970s generated a simultaneous increase in unemployment and inflation, leaving their models of how western economies worked largely irrelevant in the face of the changing balance of power in oil production and the international monetary fallout. Undoubtedly oil in part has made an analytical reappearance in recent years. There has been considerable discussion of the causes of the recent rise and fall of prices (Hamilton 2009; Lutz and Murphy 2014) and the financialisation of oil markets (Gkanoutas-Leventis and Nesvetailova 2015; Kaufmann and Ullman 2009). US foreign policy scholars and commentators have also explored the geo-political impact of oil (Morse and Richard 2002; Bromley 2008; Yergin 2012; Blackwill and O’Sullivan 2014). Yet with a few striking exceptions (Hay 2011; DiMuzio 2012; Mitchell 2013) oil has had a very limited place in macro-analysis of the pathologies at work in the present political economy of the West. The discourse of crisis rightly deployed in political economy scholarship since 2008 has focused on one or more of debt (Gamble 2014; Streeck 2014), the ideological victory of neo-liberalism (Blyth 2013; Crouch 2011; Gamble 2014; Streeck 2014), technological and demographic change INTRODUCTION 3 (Gamble 2014; Summers 2016), and productivity (Gordon 2016). Strikingly, even those who have extremely insightfully placed the contemporary western economic crisis in a longer temporal crisis going back to the 1970s (Gamble 2014; Streeck 2014) have said rather little about oil in macro-economic and geo-political terms, despite the fact that the two oil price shocks are routinely described in virtually all accounts of the crisis of the 1970s. The relative absence of oil in the macro historiography of the western economic crisis compared either to ideational or other material factors makes little conceptual sense once we acknowledge oil’s place in the underlying material basis of western civilisation without which ideological politics as we know it would not exist. It also makes little empirical sense once we take a look at the visible economic and political world we have inhabited since the turn of the century. Quite conspicuously, the 2008 crash was preceded by a third oil price shock that saw prices reach around $150 a barrel in June 2008, 30 per higher in constant prices than the last peak they reached in 1980. The post-crisis world, meanwhile, has seen a transformation in oil production that has led to a resurgence of American oil production and the world’s largest holder of oil reserves to declare war on the shale industry, throwing into tumult the geo-political axis that has largely guaranteed western oil interests for the past four decades. Both before and after 2008 oil has posed massive problems for central banks and confronted the West with geo-political predicaments from the Middle East to Russia. Without a narrative that gives oil predicaments and their consequences substantial explanatory weight it is impossible to understand the macro-economic landscape and geo-political world that western states now inhabit. This book aspires to tell the story of the western economic crisis through the lens of oil and in doing so connect the present set of economic and political predicaments facing western countries to the older crises of the 1970s. It argues that the stagnation of conventional oil production around 2005 and the rise of non-conventional oil as a response to that material reality has created a Gordian knot of macro-economic and geo-political problems, the fallout of which pose a fundamental challenge to the assumption of progress embedded in western expectations of democracy. Whether or not oil will be eliminated as an energy source in the future in a revolution of solar power and battery technology, as promised by entrepreneurs like Elon Musk, the problems generated by oil as the world’s present premier energy source have had a profound 4 H. THOMPSON impact in shaping today’s economic and political predicaments and their legacy will remain for the foreseeable future. (Given the laws of thermodynamics and the enormous federal and state subsidies that Musk’s lossmaking companies consume there is also little reason to think that an alternative future will arise with any alacrity.) In reflecting upon the place of oil in the west’s present economic and political problems, I will not engage with the issue of climate change. This omission is not because I in any way wish to minimise the threat that rising carbon emissions pose to the sustainability of human life on this planet. Rather, it stems from the recognition that since the world now consumes 28 million more barrels of petroleum every day than it did in 1992 when the representatives of 166 states signed the United Nations Framework Convention on Climate Change climate change concerns have thus far not made oil less important to western economic life or mitigated the problems oil has generated (US EIA 2016a, 2016b). Explaining the reasons for that failure and the likely consequences of it that would be a different book. Neither do I wish to suggest that oil dependency has only generated problems for the West. Indeed, a significant part of the rise of oil consumption since the early 1990s has occurred in non-western countries, not least in China leaving the Chinese economy vulnerable too to oil shocks. I concentrate in this book on oil as an economic and political problem for western states alone because its role in the crisis afflicting western economies since 2008 has largely been erroneously ignored. The book begins with the problems oil created for western states in the decade leading up to the 2008 economic crash. Chapter one explains how the stagnation of conventional oil production under the weight of both geological and political pressures at time when the demand for oil from China and India was increasing substantially produced an extremely sharp rise in oil prices. It argues that this oil price shock created a spectre of the return of the stagflation of the 1970s and set in motion the recessions that marked the macro-economic side of the 2008 crash. The second chapter considers the rise in supply of non-conventional oil as a response to the pre-crash oil price hike. It shows how the American shale boom was dependent on the monetary environment created by quantitative easing and zero interest rates and all that has come with them, including the perversion of financial markets since 2008. It also explains how US shale production produced a counter action from conventional oil producers, and analyses how the consequences of this reaction, which included a sharp fall in oil prices from the middle of 2014, have produced huge INTRODUCTION 5 monetary problems for central banks and destabilised the US relationship with Saudi Arabia. The third chapter reconsiders these macro-economic and geo-political problems in light of the oil crises of the 1970s and argues that the underlying causes of these crises have returned over the past decade in a more lethal form. The final chapter draws some conclusions about the implications for western democracies and the presumption in western politics that time ultimately guarantees progress.
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