Saturday , June 23 2018
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The shape of things to come

When the trucks stop running, the economy crashes… and it does so rapidly.  That is a lesson that Brazil has reminded us of this week.  But it is a lesson that more developed states like the UK ignore at their peril.

Problems began, as is often the case, with a hike in the price of diesel that ate into the income of professional drivers.  The result was a truckers’ strike that brought the Brazilian economy to its knees in a matter of days.  As Dom Phillips and Sam Cowie at the Guardian explain:

“The protests began over fuel prices but have been further stoked by widespread anger over repeated graft scandals involving prominent politicians – including Temer himself.

“In São Paulo and Rio de Janeiro, supermarkets and restaurants are running low on supplies. Some factories have shut down, bus services been reduced and even the Refugees World Cup, scheduled to take place in São Paulo on Saturday, has been cancelled.

“The Folha de S Paulo newspaper site reported that 11 airports including one in the capital city Brasília have run out of fuel, and long queues have built up at gas stations around the country.”

The Brazilian government has used the army to break the protests.  However, disruption and shortages are expected to continue in the coming weeks.

Events in Brazil will stir memories here in the UK, where similar protests in 2000 and (to less effect) 2012 resulted in shortages and a rapid dislocation of the wider economy.  As with Brazil, the sudden loss of fuel supplies resulted in cascading shortages across the economy; and these were exacerbated by panic buying and, more broadly, by the failure of government to understand – still less plan for – the emergency.

The BBC timeline for the “Countdown to crisis: Eight days that shook Britain” gives an overview of the rapidity with which what began as a relatively small protest morphed into a national emergency.  Three days into the protest:

“As early editions of the Sunday papers hit the streets, the protests rate fewer column inches than Mo Mowlam’s new biography.”

However, by day seven:

“A total of 280 tankers leave depots around the UK, in addition to the 60 which pulled out on Tuesday night – just a fraction of the 3,000 deliveries typically made each day. More than 90% of petrol stations have run dry.

“Some 200 truckers park up along Park Lane, bringing parts of central London to a standstill.

“Food rationing returns to Britain as panic buying shifts to supermarkets. Some shops are bare of bread and milk.

“The NHS is put on red alert – which means at a moment’s notice, all hospitals must be ready to cancel all but emergency cases.”

Behind the scenes (as with Brazil today) the government had approved emergency powers to use the military to break up the protests and get fuel deliveries moving once more.  However, on the eighth day, the protests were called off after protestors claimed that they had made their point.

The Brazilian and UK fuel protests give an early indication of what is in store as the world moves away from cheap and easy conventional oil supplies and becomes increasingly dependent upon expensive and difficult unconventional oil from bitumen sands, shale deposits and ultra-deep water.  What they demonstrate is that people will not sit around passively as their living standards are increasingly constrained by rising fuel prices; particularly at a time when taxes and debt-servicing costs are rising remorselessly.

Every country has a fuel price limit that, once hit, will trigger these kinds of protest.  In the UK it was the symbolic point at which a litre of diesel rose above £1.00 in 2000 and £1.50 in 2012.  Exactly where the limit is in the USA – where diesel currently sells at around .54p per litre (compared to £1.24 in the UK) – we have yet to find out.  In the UK, we can be pretty sure that after years of stagnating wages, the £1.50 mark will not be passed without some unrest.

The point is that the economics of supply and demand are not as simple as the textbook models pretend… and people can act in socially-destructive ways when they lack sufficient information.  There are going to be fuel protests in future simply because global demand for oil is outstripping supply once more, while people’s – especially professional drivers’ – ability to absorb higher prices is limited.  When those protests happen, the lesson from both the UK and Brazil is that, in the absence of forward planning by the state, they can bring an economy to a halt in a matter of days.

Less well known is that when the dust settled after the September 2000 protests in the UK, it turned out that 90 percent of (non-fuel) commercial deliveries had been made.  Nevertheless, the disruption to complex just-in-time supply chains following the loss of just 10 percent of deliveries was sufficient to trigger a cascading economic collapse that threatened to bring the entire economy to a halt.

We might object that these protests are in a sense “artificial.”  The damage done was not to do with a “natural” shortage of oil, but the political actions of militant agitators; inadvertently aided and abetted by our collective tendency to panic buy at the earliest opportunity.  In fact, we should take little comfort from this.  Because it is entirely true that there was surplus fuel at the refineries that was available to aid the recovery in the days and weeks after the protests ended.  One day – most likely sometime in the next decade – that will not be the case.  Although the UK and the USA produce oil of their own, they are both oil importers; heavily dependent upon growing supplies from elsewhere in the world.  And “elsewhere” has been shrinking in recent years.  The number of discoveries has plummeted and the oil that still remains is harder and more expensive to produce.  Moreover, growing demand for the remaining reserves from fast developing countries like Brazil and, most notably, China, point to periods of eye-wateringly high prices at best and supply shortages at worst.

Of course, the economic crash and depression that will follow in the wake of price spikes of this kind will bring prices tumbling down again.  But this will be of little comfort given that we only need to lose ten percent of deliveries to bring the economy to a standstill.  That ten percent (or more) will be the delivery companies and independent drivers that went bust as a result of the oil price spike.

For all the talk of a “fourth industrial revolution” powered by “green energy” giving rise to a new “knowledge economy,” the fuel protests in Brazil this week remind us that we remain as heavily dependent on oil as we have been at any time in the last six decades.  The future we can look forward to as increasingly expensive oil becomes the norm is not the future of Apple, Facebook and Tesla, but a future in which all discretionary spending comes to an end as what little wealth remains is sucked into the three vortices of tax, debt and rising energy prices.

As you made it to the end…

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