consciousnessofsheep | The geology of US oil might have been straightforward; the economics was a little trickier. In the course of the Second World War, the USA supplied six out of every seven barrels of oil consumed. Venezuela accounted for most of the seventh barrel; with small contributions from British Persia and the Soviet Caucasus. Germany’s oil sources had been inadequate to power its civilian economy; and its failure to capture and bring online the Caucasus oil in 1942 is the primary reason why it lost the war.
The war-torn economies which emerged from the ashes of war in 1945, then, were almost entirely dependent upon oil from the USA. And this allowed an internal American oil cartel – the Texas Railroad Commission – to extend its price fixing to the entire world. So long as US oil made up a large part of global oil production, and so long as US oil fields had excess capacity, the TRC could regulate the global oil price. If prices began to rise too high, the TRC would order companies to produce more oil. If prices sank too low, the TRC would order production cuts. As a result, throughout the boom years 1953 to 1973, the world oil price remained stable at around $25 per barrel (at today’s prices).
When the US conventional oil fields peaked in 1970, the TRC lost its ability to prevent prices from rising by expanding production. This was a boon for Middle East and North African producers whose production costs were higher than those in the USA. And although the first – 1973 – oil shock was in part a response to western support for Israel in the Arab-Israeli war, sooner or later the newly empowered OPEC was going to cut supply to drive up prices.
It is an irony that a capitalist system which claims to be built upon competition and free markets has proved stable only in those periods when its source of value – energy – has been controlled by cartels. Once OPEC-led price stability was regained in the mid-1980s, the stage was set for the global debt-boom of the 1990s and early 2000s. And with the fall of the Soviet Union and the apparent conversion of China to state capitalism, for a brief moment the world seemed content.
Peak oil had not, though, gone away; it had merely been postponed. Britain discovered this the hard way after its North Sea deposits – which had once produced more oil than Kuwait – peaked in 1999. By 2005 – the year global conventional oil extraction peaked – Britain had become a net importer of oil and gas. Today, Britain’s North Sea deposits produce 60 percent less oil than in 1999; and the projected price of the remaining oil is not enough to cover the decommissioning costs.
By 2005 though, had we but known it at the time, we had bigger problems to deal with. The experience of the oil shocks of the 1970s convinced many peak oilers that once the peak of global oil extraction had been reached, prices would rise remorselessly as a consequence of supply and demand imbalance. This, indeed, is what appeared to happen after the 2005 peak was reached:
By 2012, Michael Kumhof and Dirk V Muir from the International Monetary Fund were anticipating global oil prices of more than $200 per barrel by 2020. But that isn’t what happened. Instead, from 2014 the oil price slumped and has been on a steadily downward trend ever since. The reason is because there is more to peak oil than geology and engineering.
Indeed, many peak oilers make the same mistake as economists in treating oil – and energy in general – as being just another relatively low-cost factor of production. The wage bill, for example, is always far higher than the energy costs of running a business. But as economist Steve Keen explains; “capital without energy is a statue, labour without energy is a corpse.” Or as engineering professor Jean-Marc Jancovici explains: “energy is what quantifies change.” Nothing happens in the world without energy. And when the cost of the world’s biggest primary energy source – oil – begins to spike upward, the impacts are felt in every area of our lives.
The story of the 2008 crash is usually told in financial terms; and is used to blame the victims. The cause of the crisis, we are told, was so-called sub-prime borrowers taking on mortgages that they couldn’t possibly pay back. Except, of course, prior to 2008 they had been paying them back. So what happened to change their circumstances so that they could no longer repay debts? The answer is interest rate rises. The banks had based their lending on the assumption that the economy was stable; that inflation would grow at around two percent; and that interest rates would remain relatively low. With house prices supposedly guaranteed to keep rising, and having securitised the risks, banks – with the assistance of governments – could extend home ownership to the masses. But from 2006, central banks had been raising interest rates; tipping borrowers into default.
Why had the central banks been raising interest rates? Because from 2005, inflation began to break out of the 1 to 3 percent band that they were charged with maintaining. According to all of the textbooks they had been brought up on, the central bankers had been taught that the way to bring inflation back under control was to raise interest rates. But they – and the economics textbooks – were wrong. What they believed to be inflation – too much currency chasing too few goods – was actually an economy adjusting to its first supply-side shock since the 1970s.
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