Saturday , July 13 2024
Home / Economy / Welcome to the permanent depression
Great Depression
Image: Tony Fischer

Welcome to the permanent depression

Technological prowess has ushered in a new century of energy independence.  Techniques for recovering the oil found in shale deposits and bitumen sands, for drilling in ultra-deep water and for recovering Arctic oil have allowed the Western states to break free from our dependency on the Middle East and Russia for the bulk of our oil.  Moreover, utilising the same technologies, a shift to even more bountiful natural gas means a century or more of energy independence.  The combined effect of this development is that the global supply of oil and gas now far exceeds demand, with the result that prices have plunged since 2014.

That is the myth that energy industry insiders and the journalists who cover them would like us to believe.  But dig beneath the rosy picture, and we find some alarming trends:

  • Global demand for oil is rising by 1 million barrels per day every year
  • More than eighty percent of the world’s oil production is in decline
  • We are losing 3 to 4.5 million barrels of production every year
  • By 2040 the world will need to find more than four times the output of Saudi Arabia – around 160 million barrels per day – just to stand still
  • New discoveries are limited in size, and last year’s exploration success rate hit an all-time low of just five percent
  • The typical new oilfield size has fallen from 500-1,000mb 40 years ago to just 75mb this decade
  • Despite being a growth industry, US unconventional oil accounts for just five percent of global supply
  • Technical developments in the fracking industry have helped mask underlying decline rates in US shale oil, but this effect will be limited in future
  • The current oversupply of oil will come to an end this year, and by 2018, even without geopolitical events and emergencies, we can expect supply problems
  • We can expect the price of oil to exceed $75 per barrel by 2018.

Are these the ramblings of some tinfoil-hatted conspiracy theorist or some free-market gold bug desperate to scare people into buying precious metals?  No.  These are the very sober – and probably conservative – conclusions of an in-depth study conducted for HSBC and targeted at its commercial investors rather than at the wider public.  The report points to a future of oil shortages (and the short-term profits to be made from them) but does not explore the likely consequences for wider society.

Our historical experience of oil shortages has generally been limited and is likely to be misleading.  In Britain, many people will remember the chaos that resulted from just five days of fuel blockades in September 2000.  For those of us old enough to remember, the long queues at filling stations were reminiscent of the oil shortages in 1973 and 1979.  There was a difference though; in the 1970s we were far less dependent upon cars to get us to our workplaces, shops and leisure facilities.  The economy that we built between 1980 and 2000 on the back of abundant North Sea oil was ill-equipped to cope with any disruption to the supply of oil.

Ten out of the past eleven recessions were preceded by a spike in the price of oil.  This is because oil is an essential input to the manufacture and transport of almost everything in the modern global economy.  If the cost of extracting oil increases, it impacts the wider economy.  Energy company profits are squeezed, transport and manufacturing costs rise, industrial agriculture becomes more expensive, prices to the end consumer increase.  At the same time, household fuel and transport costs increase leaving less cash available for discretionary purchases.  As a result, it is the discretionary sectors of the economy that crash first – one reason why we highlighted the apparently trivial collapse in personal hygiene product sales in 2016.

Our immediate difficulty stems from the fact that while energy industry insiders, journalists and politicians have talked about low oil prices since 2014, at more than $40 per barrel, they are not cheap by historical standards.  Indeed, historically anything above $40 per barrel (at today’s prices) tends to result in economic stagnation.  In order to maintain economic growth, we depend upon prices below $30 per barrel, and ideally less than $25 per barrel.

Our predicament can be summarised thus: in the twentieth century we built an interconnected capitalistic global economy on the back of cheap and abundant oil.  In 2005, that cheap and abundant oil went into decline.  There is still plenty of oil under the ground – indeed, probably more that we have ever used.  But we have already burned our way through all of the cheap and easy to extract deposits.

The question that flows from this is what happens when we try to run a $30 per barrel economy on $75-plus per barrel oil?  The short answer is, one very different to what we became used to.  An increasing proportion of our individual, household, corporate and national incomes will have to be used to cover the cost of more expensive energy.  This will inevitably expose huge contradictions in the way the economy works.  Individuals and households will be crushed as governments seek to cut public services and social security while increasing taxes even as companies are increasing prices and driving down wages.  The resulting collapse in discretionary spending across the economy will lead to widespread bankruptcy.  Eventually, critical infrastructure – which depends upon mass usage to meet maintenance and development costs – will be rendered unprofitable.  However, states will lack the tax-income to continue to operate them in the longer-term.

Will humanity come together in the face of this existential crisis?  American journalist Chris Hedges thinks not:

“The final stages of capitalism, Karl Marx predicted, would be marked by global capital being unable to expand and generate profits at former levels. Capitalists would begin to consume the government along with the physical and social structures that sustained them. Democracy, social welfare, electoral participation, the common good and investment in public transportation, roads, bridges, utilities, industry, education, ecosystem protection and health care would be sacrificed to feed the mania for short-term profit. These assaults would destroy the host. This is the stage of late capitalism that Donald Trump represents.”

Arguably, this process is already well underway.  The rise in dependence on foodbanks, the growth of the hyper-exploitative “gig economy”, the wholesale collapse in workers’ productivity, the growth of in-work poverty, and the rise of fuel poverty are all signs of a collapse in overall consumer spending power in an economy that depends upon mass consumption for its existence.  More alarmingly, a significant proportion of the middle class – those outside the protected (for the moment) salaried roles in the public and corporate sectors – have seen their standards of living fall, and are increasingly aware that the safety nets that were supposed to protect them have long since been hacked away.  Politically, this has resulted in a collapse in support for the centre parties that continue to promote business as usual.  Brexit, Trump, LePen, Grillo, et al are merely the first manifestation of a divisive political extremism that is bound to follow our final recognition that politics is no longer about how we share the benefits of growth, but who gets to suffer the consequences of decline.

Consider your own situation.  Ask yourself how your own life is likely to change if the price of petrol were to rise to say £2.00 per litre while your household income remained stagnant.  Remember too that the price of almost everything else will be increasing proportionately.  You might do what millions of others have been doing since 2008, and use unsecured debt to cover the deficit between your income and expenditure.  But this only works if there is an end in sight – a new round of inflationary growth that will provide you with the additional income needed to pay off the debt.  But with a growing proportion of everyone’s income having to cover the cost of increasingly expensive and rare oil, we are more likely to experience another deflationary crash.  As a result, the cost of servicing your existing debts becomes yet another non-discretionary expense that pulls money away from the dwindling luxuries your household can still afford.

Some on the ecological left may welcome this scenario.  In future we will be forced to consume less.  As a result, we will be burning far less fossil carbon and doing far less damage to the environment.  But this is unlikely to lead us to some kind of ecological nirvana.  The renewable energy technologies that we thought were going to save the day in back in the 1980s simply did not get deployed when we had cheap and abundant fossil fuels to do the job.  Look behind all of the renewable energy technologies at the oil-intensive raw material extraction, industrial manufacturing, transportation and deployment processes and you quickly understand that what we failed to do when oil was cheap and abundant is going to be impossible to do as oil gets scarce and expensive.

Even now, were we to develop a sense of national and international urgency, we might salvage a great deal of our current standard of living by replacing fossil fuels with a combination of renewables and 4th generation nuclear.  The problem is that as available oil supplies fall, the impact will not be shared.  Each of us will experience our and our family’s part in the collapse in isolation.  A job loss, a cut in pay, ill health or the calling in of your debts will be the trigger for your personal collapse.  But life will go on for those around you.  And so long as the politicians and journalists are allowed to get away with blaming the victims (while maintaining growth for the elites on the back of taxpayer-funded bailouts) we will not develop the kind of solidarity required to make the necessary sacrifices to secure sufficient energy for future generations.

Check Also

Nowhere to run

World oil production peaked in November 2018. Not that many of us noticed because the western states went insane in the spring of 2020 and have yet to restore any semblance of sanity