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OPEC and out
The political fallout from the OPEC+ decision to cut its oil production target by two million barrels a day – which would leave the world economy around six million barrels a day short of its pre-pandemic peak – is sufficient to push us closer to collapse. The Biden administration, who optimistically believed the President had secured a 200-million-barrel deal with the Saudis to replenish the USA’s strategic reserve, have treated the announcement as tantamount to a declaration of war. Although there is no law of physics that says oil producing states have to provide the west with cheap oil.
The decision is yet another Western own goal in an economic war that the west is clearly losing. It was the Biden administration’s decision to refuse new licenses for US domestic production which, despite depletion, could still fill the gap left by OPEC+ cuts (although the USA – like the UK – still needs to import heavy oil). It was also their decision to empty the strategic reserve, which is meant for dire emergencies, solely to keep pump prices down ahead of next month’s mid-term elections. Elections that Biden’s team may well lose, as Michael Shellenberger reminded Americans this week, the situation:
“… poses political risks for Democrats who, in the spring of 2020, killed a proposal by President Donald Trump to replenish the SPR with oil from American producers, not OPEC+ ones, and at a price of $24 a barrel, not the $80 a barrel that the Biden White House promised to OPEC+. At the time, Trump was seeking to stabilize the American oil industry after the Covid-19 pandemic massively reduced oil demand. Trump and Congressional Republicans proposed spending $3 billion to fill the SPR. Senate Democratic Leader Chuck Schumer successfully defeated the proposal, and later bragged that his party had blocked a ‘bailout for big oil.’”
The Biden administration’s response is likely to be an attempt to implement the No Oil Producing and Exporting Cartels – NOPEC, geddit? – Act, which passed through the Senate in May, to bring anti-trust suits against OPEC+ states and to impound their US-held property. Although, as Alex Kimani at OilPrice notes:
“… it remains unclear exactly how a U.S. federal court could enforce judicial antitrust decisions against foreign nations, not to mention that other countries could retaliate by taking similar action on the United States, for example for withholding agricultural output to support domestic farming…
“Several analysts have also warned that the bill could lead to unintended blowback, and OPEC nations could strike back in other ways. For instance, in 2019, for example, Saudi Arabia threatened to sell its oil in currencies other than the U.S. dollar if Washington passed a version of the NOPEC bill. Such a move would reduce Washington’s clout in global trade by undermining the dollar’s status as the world’s main reserve currency, while also weakening the U.S.’ ability to enforce sanctions on nation states. The Saudis might also hit back by buying their weapons elsewhere thus denying U.S. defense contractors lucrative business.”
These latter concerns point to the likely next steps, as it is an open secret that Saudi Arabia is partnering with the BRICS states in their project to launch a new, commodity-backed reserve currency which is expected to encompass a third of world trade the moment it is launched. And, given the fiat nature of the currencies used in the Western empire, is likely to rapidly grow in importance.
The OPEC+ announcement may not though, be entirely geopolitical in nature. Concerns about the true level of OPEC reserves have been growing over the last couple of decades, with the increasing use of expensive “enhanced oil recovery” techniques. And so, while some of the fall in world production can be blamed on lockdowns, ill-conceived responses to climate change, and sanctions on Russia, concern has been increasing this year that OPEC states may no longer have the capacity to raise production. At the very best, the production cut may reflect the $150-$200 oil price which might be required even to maintain today’s level of output for a few more years. At worse, it may simply be the first recognition of an irreversible decline in output which will bring an end to the western parts of the global economy in short order.
This might also explain why the Western technocracy seems so keen to commit economic suicide. Peak oil means the end of real economic growth. In a growing economy, everyone can be better off, even if some are less well off than others, and a handful of godzillionaires accumulate more wealth than anyone can imagine. In a shrinking economy, everyone is playing a zero-sum game in which one person’s benefit must come at someone else’s expense. And so, the only way in which “the golden billion” – those of us who live within the USA and its vassal states – can maintain our energy-gorging lifestyles, is to somehow obtain what remains of the planet’s energy reserves… even if our oil and gas happens to be beneath someone else’s country.
The emerging BRICS bloc may well be making the reverse calculation. If the 75 percent of the world’s countries which are not within – and have been historically exploited by – the Western states were to deny those states the energy and commodities they have become accustomed to, then the remainder of the world’s people might be able to grow their standard of living for another decade or so. In the past, it has been the threat of the US military arriving to impose “freedom and democracy” on resource-rich countries which has prevented them from closing ranks. But with the post-lockdown western economies in tatters, and following the US debacle leaving Afghanistan, together with apparent western military and economic impotence in the conflict with Russia, it might not just be Saudi Arabia and its OPEC partners which decides that an alliance with the BRICS and the adoption of a new world currency is their best bet… even if it spells disaster for the population in the west.
Prices up – inflation down
The – largely wrong – economic model being followed by the western central banks assumes that all price increases are inflation, that they always result in a wage-price spiral, and that the only way to cure them is to cause a recession by raising interest rates. The problem for us today is that none of these assumptions is true.
There was, it is true, a brief period during which wages declined at a slightly slower pace than they had been, simply because of post lockdown shortages. But these have largely fed through the economy over the past year. Vacancies are declining, business activity is slowing, and we are working fewer hours than we had been before the pandemic. And with redundancies and insolvencies beginning to increase – even before the full effects of energy shortages and higher costs had arrived – wages look set to continue falling.
A victory for the central banks then? Well, not quite. The OPEC+ decision – probably forced – to announce oil production cuts, coming on top of western sanctions, guarantees another wave of price increases across western – and especially European – economies over the next year. Not just because energy costs are rising again, but also because the price of everything else which depends upon energy or which is derived from oil or gas, will be increasing too.
It is here that central banks and governments are very likely to run into serious trouble in the coming months. Because inflation – in its true sense – refers to an inflation of the money supply. But these price increases have nothing to do with the supply of money. Indeed, they are likely to have their greatest effect just at the point at which the money supply across the western economies is deflating at a rapid rate.
Within the national economies, deflation is happening for pretty much the same reason that it happened after 2005 – in effect, “peak debt.” Because while many people – including neoclassical economists and neoliberal politicians – assume that governments – via mints and central banks – create our money, the reality is that almost all – around 97 percent – of the currency in circulation is in the form of “bank credit” which comes into existence when banks make loans. Of course, once it has entered circulation, this bank-generated funny money is indistinguishable from the supposedly real three percent of money that governments spend into existence. And while some of this currency exits the economy through the payment of taxes, most of it disappears into thin air when businesses and households pay off their debts.
The problem is that bank credit comes with interest attached, so that there is always more debt in existence than there is currency to repay it. In part, and so long as the gulf is not too great, this issue is overcome via the velocity of money – the number of times it is exchanged before leaving as tax or a debt repayment. Indeed, one of the problems plaguing the post-2008 western economies has been that the velocity of money has fallen close to just one. And in such circumstances, it is essential that banks continue to lend… but who the hell to?
Who in their right mind is going to approve mortgages for all but those on the highest incomes during an energy and cost of living crisis? Well, given that most of the banks have cancelled previously agreed mortgages, and are no longer taking on new customers, obviously not Britain’s banks. Businesses are unlikely to fare any better as inventory is growing and custom has slumped. It would be a brave loans manager who offered more credit to firms that are already sinking beneath the weight of higher energy bills and falling demand.
The key point here is that it does not take a credit freeze to trigger a deflation, it only requires that the rate of lending declines at the same time businesses and households are paying off debts – in short, more money leaving the economy as far less is entering it.
Something similar is happening on entirely unregulated international markets, where banks create euro dollars out of thin air in the same way as domestic banks create bank credit. And as is the problem with domestic lending, at a time when economies are descending into recession, more organisations are seeking to pay off outstanding debt than are prepared to take on new debt, even as banks cut their lending anyway. The result is a growing global dollar shortage which is exacerbated by the US Federal Reserve’s historically rapid increase in interest rates.
What this all means is that, even as energy-based price increases radiate out across the global economy, monetary deflation is set to make something – probably lots of things – break. The UK saw a hint of this with the recent margin calls on pension funds, and banks like Credit Suisse and Deutsche Bank jostle to become the next Lehman brothers in the sequel to the 2008 crash. Only this time around, what was too big to fail in 2008 is likely to be too big to save.
Constructive ambiguity
The art of constructive ambiguity is a favourite pastime in Versailles -on-Thames. Not least because it plays into the institutional laziness of the establishment propaganda outlets. In 1991, for example, as the government split over the signing of the Maastricht Treaty, all eyes turned to their former leader, Margaret Thatcher to see whether she was for or against a referendum. Thatcher’s response was:
“If the decision is a case of changing the relationship between parliament and the people then there is a case for the people to be consulted.”
This was reported at the time as thatcher being in favour of a referendum. But that is not what she said. And to this day, commentators on both sides of Brexit argue whether she did or did not favour a referendum.
Similar constructive ambiguity is being spouted today about the looming energy crisis. By effectively subsidising energy bills, the UK government has guaranteed gas shortages, which – because gas is the biggest source of electricity in the UK – means that power cuts this winter are now inevitable. Indeed, even the energy industry – who are the main beneficiaries of government largesse – have come out against what the government is doing. As Ron Bousso and Shadia Nasralla at Reuters reported on Tuesday:
“European governments should tax corporates to help weaker parts of society weather soaring energy costs but not intervene to cap gas prices, Shell Chief Executive Officer Ben van Beurden told an energy conference on Tuesday…
“The veteran oil executive, who will step down at start of next year, said that European governments should not intervene in market exchanges in a bid to limit gas prices.
“’Can we make a meaningful intervention in gas markets here in Europe? That is a much more challenging prospect,’ he said. ‘The solution should not be government intervention but protection of those who need protection.’”
Market pricing is the most common means of rationing anything which is in short supply – we might all want something, but only those with the spare cash can afford to buy it. But it is one thing to leave it to the market to allocate discretionary goods like sportscars, designer handbags or Swiss watches, but something different when it comes to essentials like food or energy. The alternative is some form of rationing which gives everyone a share of whatever is in short supply so that those without enough income do not lose out. This, however, appears to have been ruled out by Dagenham Liz both during her leadership campaign and during an interview a fortnight ago:
“We are not talking about [the] rationing of energy.”
Notice how Alix Culbertson at Sky News reported this as:
“Truss promises UK will not ration energy…”
But did Truss promise anything? Not at all. What she said was that some “we” – the government? Her advisors? Her friends and neighbours? – were not talking about rationing. But who knows, now that the Russian pipelines have been sabotaged, maybe they have started talking about rationing after all. Or maybe the Truss administration are talking about something more sinister – simply allowing random power cuts. After all, the energy regulator Ofgem has warned that the UK faces significant shortages this winter. As Dearbail Jordan at the BBC reported earlier this week:
“Ofgem said due to Russia’s war with Ukraine, there is a possibility the UK could enter a ‘gas supply emergency’. This would lead to supplies being cut to power stations which use gas to generate the country’s electricity. Gas-fired power stations generate between 40% and 60% of the UK’s electricity.”
And today, the BBC’s Noor Nanji reports a similar warning from the Grid operator:
“British households could lose power for up to three hours at a time this winter if gas supplies run extremely low, National Grid has warned… Cuts would probably occur at peak times such as morning or early evening, and customers would be warned in advance.”
Left unspoken is the likely atmospherics which will result in power cuts in the UK. Because of our over-use of wind turbines, we are most vulnerable to high pressure air systems which are associated with extreme weather – heatwaves in summer and cold waves in winter. That is, it is precisely at the point when demand is at its highest that supply will fail, and cuts will be inevitable.
Perhaps it is time for Truss and her buddies to do something more than just talk about rationing, and instead dust off the old contingency plans which were developed after the energy crises of the 1970s.
The essential difference
Readers outside the UK may not be familiar with the two political parties which contend our first-past-the-post elections. But for anyone wondering what the difference is between the Conservative and Labour Parties, this video helps to explain:
Pet cemetery
The British people’s famous love of animals is being severely tested by the cost-of-living crisis… (which, by the way, only officially qualified as a “crisis” when the budgets of middle-class metropolitan liberals were impacted). According to Jonathan Fagg and Vanessa Fillis at the BBC:
“The RSPCA has said the number of abandoned pets in England and Wales is up 25% compared to the previous year. Data provided by the charity shows as of July, it responded to 22,908 animals being left by their owners.
“It said Covid and cost of living fears meant fewer people considered taking on a pet, with the number of rehomed animals down 10% year-on-year.”
Nor is the RSPCA the only charity to find itself struggling to cope with the upward trend in abandonment. In August, Aaron Tinney at Metro made a similar report:
“Growing numbers of Britons are parting with their pets – from cats and dogs to snakes and lizards – as the cost-of-living crunch keeps biting. Some owners are dumping them on streets, with 206 dogs and 164 cats currently being looked after at rehoming centres run by the Battersea animal charity.
“It’s a similar story at other centres across the country – with some seeing record inquiries for dog and cat returns – as the tightest squeeze on living standards since at least the 1960s is forcing droves of owners to decide the additional cost of food plus hundreds of pounds in vet bills is no longer manageable.”
Worryingly, this abandonment of pets – which most people will have agonised over – is occurring before the worst of the cost-of-living crisis arrives in the form of cold weather and eye-watering heating bills. Moreover, the business model of animal rescue charities – like those of foodbanks – assumes a stable economy in which the better off are able to make donations even as need remains relatively low. Today we have the opposite – declining donations even as the need is rising.
The end result might be something akin to the (rarely mentioned in polite company) 1939 pet holocaust. When the actions of a similarly inept Tory government led to the mass slaughter of Britain’s cats, dogs and hamsters.
Another fuel shortage
Staying warm is on many Briton’s minds as winter approaches. And one – almost vanity – form of heating in recent times – the iron wood burner – is being pressed into service to meet the emergency. Unsurprisingly then, as gas prices have risen precipitously and as shortages loom, demand for wood burners, wood supplies and – perhaps less obviously – for chimney sweeps – has increased dramatically. So much so that it is likely already too late for anyone thinking about this option now that winter is just weeks away.
One unforeseen consequence of the sanctions salad on Russia is that the iron used in the manufacture of wood burners is no longer available, so that shortages are appearing as older inventory is bought up. Wood – which is also an import from Russia – is also harder to come by, as demand has increased far above that of previous years. And the chimney sweeps? Well, according to my mate Brian, who recently tried to hire one, if you want your chimney swept, you might have to wait until next spring.
Spam fritter
Britain’s supermarkets are now in full cost-cutting mode as prices spiral upwards even as demand slumps. I was not particularly surprised, then, when my friend Julia pointed to a new product – spam fritters – in the frozen food aisle. People of a certain age will remember that spam was one of the few affordable sources of protein in the British wartime diet. And it appears that it will now take the place of higher value meat cuts in the local supermarket, alongside a new range of “value” products tailored to meet the needs of an increasingly impoverished UK consumer base.
This is no doubt the beginning of a period of heated competition in which the supermarkets attempt to maintain both footfall and profitability in the face of an economic crisis which is working against both. And the end outcome is going to be that at least one of the big supermarkets is going to go bust sooner rather than later.
As you made it to the end…
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