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Playing seesaw

Recently, re-reading Tom Sharpe’s Blott on the Landscape, I stumbled upon this passage:

“… she was faced with the destruction of everything she loved, the Hall, the Gorge, the wild landscape, the garden, the world her ancestors had fought for and created.  All this would go, to be replaced by a motorway which would be a useless, obsolescent eyesore in fifty years when fossil fuel ran out.”

The book was first published in 1975, so Sharpe was probably writing it in 1974… in the shadow of the OPEC oil embargo which gave the western states their first taste of what life is going to be like when oil production depletes.  Not that Sharpe was a “peak oiler,” it is just that this sentiment was widely shared in the mid-1970s.  For the most part, the oil shock resulted in the first – and most realistic – “green” movement, based around conservation and lowering our use of fossil fuels… solar panels, wind turbines, and electric cars existed in those days, it was just that nobody was insane enough to believe we could run an advanced industrial economy with them.  In any case, the period of global warming through the nineteenth and early twentieth centuries had come to an abrupt halt, and the climate fear at the time was of a new ice age:

We now know that the global cooling between the end of World War Two and the early-1980s was caused by reflective particles in the upper atmosphere caused by burning coal, and that the rapid global warming since 1980s is a consequence of the various clean air measures taken in response (which is why it is very likely that the global elites will use “geoengineering” – spraying reflective aerosols into the upper atmosphere – once they realise that the corporate “net zero” scam isn’t going to work.

Perhaps the most surprising outcome of the 1970s though, is the degree of denial that set in by the end of the decade.  After all, American geologist Marion King Hubbert had correctly predicted the 1970 peak of continental USA oil production, based on a roughly 40-year process from discovering an oil deposit to the high point of production.  Using the same calculation on a global scale, since peak oil discovery was in 1964, then the peak of global production could be expected around 2004.  And while we may have quibbled about the exact date, in the 1970s most people understood that there would come a time when the oil – and the other fossil fuels – would run out.

The other part of Sharpe’s quote plays an important part in this story too.  His fictional motorway was a proxy for several secondary motorways which were under construction in the UK at the time.  The main motorways – the M1, M2, M3, M4 (as far as Bristol) M5 and M6 – had been constructed, joining England’s main ports and cities to London.  But a host of motorway class by-passes and joining roads remained to be constructed along with the 117-mile car park that is the M25 London orbital motorway.

Economically, there is much more to this than mere road building.  Different energy sources come with discrete technologies which are best suited to harnessing them.  Wind, for example, is best captured using sails – on windmills and on ships – water is best captured with water wheels.  Coal lends itself to steam engines which – once the condensing engine had been invented – can power railway locomotives and steam ships.  Oil is most efficiently harnessed using internal combustion engines, which can either power machinery directly or act as a generator to drive an electric motor.  Transport almost always follows an economy’s primary energy source.  For example, prior to the development of railways, it had been quicker and more efficient to sail or row ships around land masses than to attempt to cross them on foot or cart.  From the nineteenth century, the world experienced a massive expansion of railways.  But it is only from the mid-twentieth century that the world experienced the giant expansion of asphalt-surfaced road networks.

Britain in the early-1970s was still in the process of switching from coal to oil as its primary energy source.  A large part of its old network of small branch railway lines had been abandoned, with only the inter-city network along with several freight-only branches still operating.  Steam locomotives no longer operated on the network but were still in use in colliery marshalling yards and on preservation lines.  Motorways and large articulated lorries were emerging as the main means of moving goods around the country.  But this could only reach a peak once the various secondary motorways and dual carriageways had been constructed.

It is notable, for example, that the UK’s first supermarket – a model of food retailing which relies upon road haulage – did not open until 1977, and that many cities only saw their first supermarkets in the early-1980s.  Moreover, the now ubiquitous out-of-town retail park only took off from the mid-1980s.

The mid-1970s, then, provided a potential inflection point from which the UK economy might have gone in a different direction.  If we had taken seriously the concern about fossil fuels “running out,” we may have chosen to maintain the old railway network, while electrifying as much of it as possible.  We might also have avoided the centralisation of the economy on London, so that far less oil-powered travel was required.  Building a network of container ports to supply local hinterlands directly would have required fewer large lorries hauling goods across the country.  Building more nuclear and gas power stations might have allowed an electrification of the economy on a more realistic scale than the current desperate attempts.  But it was not to be… because of geopolitics and one simple accident of geology.

The OPEC oil embargo was an artificial shock.  Oil wasn’t running out.  Indeed, far more oil has been produced since – only the rate of production has slowed.  Nor did the increased price of oil – which was inevitable once America’s Texas Railroad Commission had lost its ability to set the world oil price – crash the economy.  Rather, and in a painful process that still echoes today, the world economy adjusted to the higher price through the first half of the 1980s.  Many of the things that we regard as a problem today – low wages, financialization, offshored manufacturing, ineffective national governments, the rise of corporate power, etc. – each emerged as a solution to the high-oil-price environment of the 1980s.

The high oil price had another consequence… particularly in the UK.  The oil companies were well aware of sizeable untapped oil deposits which had previously been viewed as too expensive to recover.  But in the new environment, oil off the North Alaskan slope, the Gulf of Mexico, and in the North Sea would be profitable.  So that, just at the point when left-leaning governments in the USA and UK were introducing policies to curb western consumption and to lower energy use, sufficient new oil was arriving to allow an alternative politics to emerge.

Thatcher and Reagan opened the spigots and, coupled to financial deregulation in 1986, used oil revenues to generate the debt-based boom of the 1990s and early-2000s.  Unfortunately, the gradual escape from the stagflation of the 1970s appeared to confirm a not entirely reliable “law” of economics… “substitution.”  According to economists – who are almost always wrong – when any good or commodity rises in price, two things will happen.  First, consumers will seek alternatives.  For example, if the price of apples goes up, people may switch to buying pears.  Second, market competition ensures that other companies will invest in productivity to bring the price of the good or commodity down again.  The oil equivalent of swapping apples for pears came in the last burst of productivity improvements to internal combustion engine vehicles – improved suspensions, better tyres, lean-burn engines, aerodynamic bodies, etc. – which made cars, vans, and lorries more fuel efficient.  At the same time, the opening up of the new oil fields appeared to confirm the idea that if the oil price rose, new deposits would be brought on stream.  And since – in the early-1980s – there was still far more oil beneath the ground than we had used so far, concern about running out became a fringe activity.

Peak oil hadn’t gone away though.  And the “energy efficiency” of the new vehicles generated a new version of the Jevons Paradox.  William Stanley Jevons was a nineteenth century economist working in the coal industry.  In the 1860s he famously went against the prevailing view that improving energy efficiency would result in lower demand for coal.  On the contrary, Jevons argued, improved efficiency would result in lower prices which would cause more people to use coal.  In the 1980s, vehicle fuel efficiencies developed in response to the oil shocks of the previous decade had the same effect – more people could afford to drive more of the time… this was, for example, the period when Britons began commuting over long distances to secure better-paid work.

There was another part to Jevons’ paradox though.  Since efficiency led to more use, it also brought forward the day when coal extraction would peak.  The same is of course true of oil, and gas too.  Think of it as being akin to a tank of water.  By increasing the amount of water we draw down, we bring forward the day when the tank will be empty.  With fossil fuel extraction, however, the problem is made worse by our extraction having begun with the cheap and easy deposits before moving on to the difficult and expensive.  Although this can appear to be a money problem, it is in fact an energy issue.  In order to obtain useful energy, we must first spend energy – money in this sense being merely a claim on energy.  The early oil deposits were cheap and easy precisely because they required less energy to obtain.  This is what is known as the Energy Cost of Energy (ECoE).  So that, for the economy as a whole, there is a proportion of our energy which must go to producing energy, leaving the surplus energy to power the wider non-energy economy.

In the nineteenth and early twentieth centuries, the ECoE of oil fell as a result of technological improvement and economies of scale.  But these tend to follow an “S-curve” where, once the early gains have been made the process slows, with only difficult and expensive improvements remaining.  And so, gradually over the years since the Second World War, the ECoE of oil rose.  Although not stated in those terms, it was this rising ECoE which underpinned the OPEC decision to force the price of oil to rise.  Put simply, OPEC states which had previously been colonies of the Europeans and Ottomans, sought a higher oil price to develop and maintain economies which had a higher ECoE than those in the west.

The same was true for North Alaska, the North Sea, and the Gulf of Mexico.  These deposits took more energy to produce and so provided less surplus energy to the wider economy.  Here though, we encounter a problem with conventional economics.  Energy is the source of value in the economy.  We see this in the difference between coal and oil-based economies.  While the difference in energy between coal and oil is small – around 10 megajoules per kilogram – the difference this makes to the economy is enormous.  As historian Paul Kennedy observed:

“The accumulated world industrial output between 1953 and 1973 was comparable in volume to that of the entire century and a half which separated 1953 from 1800.  The recovery of war-damaged economies, the development of new technologies, the continued shift from agriculture to industry, the harnessing of national resources within ‘planned economies,’ and the spread of industrialization to the Third World all helped to effect this dramatic change.  In an even more emphatic way, and for much the same reasons, the volume of world trade also grew spectacularly after 1945…”

Without oil the western economies couldn’t have condensed 150 years of economic growth into just two decades.  Indeed, without the exponential growth in oil production during that period, such spectacular growth could never occur again.  But for all that, the price of oil reflected only the cost of drilling it out of the ground… but a fraction – the equivalent of 4.5 years of human labour for a single barrel – of the value it provided in return.

Herein is a key economic consequence of rising ECoE – the tendency for the rate of (energy) profit to fall.  Even during the 1990s, as the monetary economy boomed on the back of an unsustainable mountain of debt, the volume of oil production continued to rise.  But out of sight of economists and politicians, the surplus energy available from that oil was already falling.  And just as the OPEC states had required more of the surplus energy from their oil to maintain their economies, so the western states began to face a similar issue – economies which had been built around a low ECoE struggled in the face of the rising ECoE from ever more difficult oil production.

Hubbert’s world peak of conventional oil turned out to be a year out.  The peak came in 2005 rather than 2004 – unfortunately for the UK, arriving at the same time Britain switched to being a net importer of oil.  The ensuing oil price rise caused central bankers to mistakenly believe that 1970s-style inflation was returning.  To head this off, they began raising interest rates – the very last thing you want to do in a debt-based economy containing a mountain of derivatives of far greater nominal value than the real economy can underwrite.  This, rather than profligate sub-prime borrowers or fraudulent mortgage brokers, was the origin of the 2008 crash – something we once again chose to deny.

As the old saying goes, “the answer to high prices is high prices” – particularly in an economy which uses a debt-based, fiat and mostly electronic currency system.  As Frank Shostak from the Mises Institute explains:

“If the price of oil goes up and if people continue to use the same amount of oil as before then this means that people are now forced to allocate more money for oil.  If people’s money stock remains unchanged then this means that less money is available for other goods and services, all other things being equal.  This of course implies that the average price of other goods and services must come off.

“Note that the overall money spent on goods does not change.  Only the composition of spending has altered here, with more on oil and less on other goods.  Hence, the average price of goods or money per unit of good remains unchanged.”

Despite the corporate acronym organisations – G7, IMF, World Bank, IEA, WEF, etc. – predicting $200-per-barrel oil by 2020, the high prices either side of the 2008 crash devastated economies around the world, with the western economies being hit hard.  Put simply, an oil price above $60-per-barrel (at 2008 rates) was sufficient to plunge the world’s consuming economies into a depression from which they have never fully recovered.  In response, consumption switched away from discretionary goods and services in favour of the now more expensive essentials.  As this happened, so businesses providing those discretionary goods and services went bust, resulting, among other things, in a steep fall in demand for oil.

This is one version of the oil price seesaw – for the first time, we reached a stage where there was no “Goldilocks” oil price which was low enough for consumers but high enough for producers:

This though, did not play out fast enough to stop billions of dollars being invested in a US fracking industry which has always struggled to turn a profit.  Much of the investment which went into US shale oil arrived when prices were still high and when predictions of $200 oil abounded.  Instead, and just as enormous volumes of shale oil were being produced, demand for oil slumped.  Even in the face of OPEC production cuts, the oil price fell below $50-per-barrel… allowing the brief period of anaemic economic growth from 2015.

Unlike conventional oil wells – most of which are now well into decline – fracking wells have a very rapid depletion rate.  So that, unlike the early hopes for “a century of energy independence” and “Saudi America,” most of the USA’s shale deposits will have been extracted in the 2020s.  After which, the only vaguely accessible deposits that remain are across Siberia – now well out of reach of the western economies.

Even with fracking, global oil production peaked in November 2018 (although a change in accounting to include large quantities of butane and propane gas gives the impression of increasing production, even as the essential “middle distillates” continue to deplete. 

The global economy was slipping into recession again in 2019 and would, no doubt, have eventually caused another banking crash without the insanity of the past four years intervening.  On the back of what today can be seen to have been fraudulent images of bodies in the streets of Wuhan and a greatly overstated rate of transmission, western governments and central banks were persuaded to create and distribute vast sums of currency to stem the economic vandalism of prolonged lockdowns.  As I warned just as the first lockdown was beginning:

“Any new currency spirited into existence by central banks and governments to combat the economic fallout from the pandemic crisis will have to be paid back one way or another.  Last time around, the bill was paid through public spending cuts which, among other things, have left our critical infrastructure woefully ill-prepared for responding to a pandemic.  The purchasing power of the average wage is no higher today than it was back in 2010; the median wage (the halfway point on the income ladder) is considerably lower.  Meanwhile the social security system has been savaged to the point that it cannot begin to cope with the anticipated job losses as Britain’s army of gig-economy and low-paid self-employed people see their incomes disappear following the collapse in demand that comes from mass self-isolation.”

A large part of that new currency was also locked down in people’s bank accounts because much of the retail and hospitality sector where it would have been spent was also closed and/or restricted for the full two years.  It was the sudden rush to spend this in the autumn of 2021 which generated the burst of monetary inflation which caused the central banks to panic (having previously correctly understood that the inflation was transitory).  The trouble was that the impact of monetary inflation was dwarfed by the supply shock that resulted from broken supply chains and locked down production.  This included oil – the price of which went negative in the early summer of 2020.  Again, the politicians had been warned that you cannot simply switch oil wells, oil pipelines, and oil refineries on and off like a tap.  In many cases, wells which shut down in 2020 never restarted.  And without the steady flow of oil, pipelines and refineries became gunked up with waxy deposits which required removal before production could rise again.

It is entirely likely that the elements within the governments of the USA and its vassals which provoked the wars in Ukraine and the Middle East, were hoping to access the last of the planet’s relatively cheap oil.  If that is the case, then it has backfired badly.  As China’s foreign minister warned at the start of the Ukraine conflict, “economic warfare is not a game for children.”  This is something a large part of Europe’s population is beginning to understand as they come to terms with the depressionary effects of their leaders disconnecting them from Russian gas, refined diesel fuel, and a raft of previously cheap minerals.

The high oil price after 2021 had exactly the impact we ought to have anticipated.  Faced with high prices and – because of the inflation – falling real incomes, most people across Europe switched their consumption even further away from discretionary goods and services in an attempt to cover the rising cost of essentials… a process severely impeded by inappropriately high interest rates. 

Although oil prices have settled around $80-per-barrel, taking account of inflation, this is lower than the 2008 $60-per-barrel point at which recessions were triggered.  Nevertheless, $80-per-barrel is far too low for most of the oil-producing states to maintain their domestic economies.  And so, we appear to be entering a new form of seesawing in which producers and consumers race to the bottom.  That is, while there had been no Goldilocks price in the 2010s, the seesawing allowed some gains to each side – between 2010 and 2015, and again between 2017 and 2019, relatively high prices helped producers, while between 2015 and 2017, oil prices fell sufficiently to allow a short rise in economic growth (albeit underwritten by borrowing at a negative real interest rate).

This time is different.  Real growth – other than the illusion of inflation – looks to be over.  And so, we have entered a stage in which both consumers and producers must lose.  The only argument is about who takes the brunt of the loss.  That is, even though we are already in a depression which is destroying discretionary demand – and thus oil consumption – oil producers are using production cuts in a desperate attempt to hold prices up.  Nevertheless, the rapid fall in demand following attempts to raise prices above $90-per-barrel show that the consuming, western economies simply lack the economic demand to consume at that price.

On the other hand, without sustaining oil prices well above $90-per-barrel, new production is unlikely to happen.  So that, oil producing states are likely to gradually remove their remaining production from world markets so as to use an ever-greater part of it for domestic (and probably subsidised) consumption.  Even so, in the hallowed halls of university economics departments, central bank board rooms and government departments, economists will still be pontificating about infinite substitutability, and about how if the price rises high enough, someone will unlock the next version of the North Sea or the Gulf of Mexico to keep the economy growing:

In the 1970s, when the reality that we would one day run out of oil was widely understood, humanity might have altered course.  The combination of lower consumption and energy conservation that formed most policy at the time would have left us better prepared.  Instead, we somehow forgot that fossil fuels are finite, and embarked on one last burst of debt-based growth.  In the process, not only did we consume ever greater volumes of oil, coal, and gas, but we created an economy and an infrastructure which depend upon high and growing volumes of fossil fuel consumption to avoid collapse.

In the 2020s, we have reached the point at which fossil fuel consumption is forced to fall.  And anyone who understands this also understands that – with a light dusting of political froth on the surface – this declining energy is the reason why everything around us seems to be breaking down.  But even now, a majority still believes that a change of government along with some brave new energy transition is just around the corner to save the day.  Only a small minority understand that – especially for the western economies – we have passed the point of no return.

As you made it to the end…

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