Oil and the western economic crisis (building a sustainable political economy SPERI research policy)
Building a Sustainable Political Economy: SPERI Research & Policy Series Editors Colin Hay Centre d’études européennes de Sciences Sciences Po Paris France Anthony Payne SPERI University of Shefﬁeld Shefﬁeld United Kingdom
The Shefﬁeld Political Economy Research Institute (SPERI) is an innovation in higher education research and outreach. It brings together leading international researchers in the social sciences, policy makers, journalists and opinion formers to reassess and develop proposals in response to the political and economic issues posed by the current combination of ﬁnancial crisis, shifting economic power and environmental threat. Building a Sustainable Political Economy: SPERI Research & Policy will serve as a
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Oil and the Western Economic Crisis
Helen Thompson University of Cambridge Cambridge, United Kingdom
The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional afﬁliations. Cover illustration: Pattern adapted from an Indian cotton print produced in the 19th century Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Springer International Publishing AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
To John Dunn, who quite rightly insisted that I should try to think seriously about politics
Over the past eight years I have written about different aspects of the economic crisis that has unfolded in the West since 2008. For much of that time I thought little about oil’s relationship to the crisis even though I was strongly conscious of the massive rise in oil prices that took place from 2002 to mid-2008. But the harder I tried to think through the idea of writing a book that captured the extraordinary nature of the post-2008 economic and political world, I found myself coming back on issue after issue to oil. At ﬁrst I thought it would be possible to add oil into an analysis of the origins and aftermath of the 2008 crisis only to realise that actually there is a story to tell about oil that can explain a signiﬁcant part of the end of the pre-2008 world and something about the nature of the one western economies and states now inhabit. The more I reﬂected on that story the more I saw parallels between the economic and political crises of the 1970s and today’s economic and political predicaments even as the monetary landscape has been transformed beyond recognition. This book is the result of that intellectual journey in which I have endeavoured to put the present western economic crisis in its apposite historical context. As with any book I have incurred debts. Tony Payne gave me the opportunity to turn what was a set of emerging thoughts into a book and did so with an enthusiasm that overtook what would otherwise have been my caution. Colin Hay encouraged me when I ﬁrst mentioned to him that I thought that oil was much more important to the 2008 crisis than most scholars and commentators allowed. Amber Husain and Christina Brian at Palgrave have been very helpful. Josh Simons provided me with excellent research assistance in collecting material on quantitative vii
easing, the ﬁnancial problems of the shale oil sector, and commodity prices. He also offered acute insight in conversation on these subjects and others. Christopher Hill and Glen Rangwala gave me some guidance on the issue of US and EU sanctions against Iran. Matt King at Citigroup engaged with me with extreme generosity and analytical sharpness on the post-2008 monetary and ﬁnancial environment. I have learned a great deal from him, and my understanding of the post-2008 monetary and ﬁnancial world would be signiﬁcantly diminished if I did not know him. My debt to my late friend Geoff Hawthorn is long-lasting. In the penultimate conversation I enjoyed with him I articulated the main argument of this book for the ﬁrst time. As I have set that argument to the written word, I have been strengthened by the memory of Geoff’s lifelong intellectual bravery in venturing into new subjects in the faith that one has to try to get better and better at understanding the world and that our old ways of thinking never sufﬁce. Without his example I would not have got here.
2 The Spectres of Peak Conventional Oil and Stagﬂation
3 Salvation and Damnation: The Rise of Non-conventional Oil and Quantitative Easing
4 Revisiting the 1970s
BoE bpd CPI ECB EEC EIA ERM EU FOMC FRB G7 GDP HICP IEA IMF ISIL MPC NATO NICE NGPL OECD OMT ONS OPEC PDVSA
Bank of England barrels per day Consumer Price Index European Central Bank European Economic Community Energy Information Administration Exchange Rate Mechanism European Union Federal Open Market Committee Federal Reserve Board Group of 7 Gross Domestic Product Harmonised Index of Consumer Prices International Energy Agency International Monetary Fund Islamic State of Iraq and the Levant Monetary Policy Committee North Atlantic Treaty Organisation Non-inﬂationary consistently expansionary economic growth Natural gas plant liquids Organization of Economic Development and Co-operation Outright Monetary Transactions Ofﬁce for National Statistics Organization of Petroleum Exporting Countries Petróleos de Venezuela
LIST OF ABBREVIATIONS
QE SMP UK UN US ZIRP
Quantitative easing Securities Markets Programme United Kingdom United Nations United States Zero interest rates policy
Abstract For the best part of a century oil has been the material basis of western economic life. Given its huge economic importance, oil is inescapably part of politics. Yet from its onset the subject of political economy has been curiously lacking in perspectives that engage seriously with energy as an economic and political predicament. Today with a few striking exceptions oil has had a very limited place in macro-analysis of the pathologies at work in the present political economy of the West. This absence makes little empirical sense once we take a look at the visible economic and political world we have inhabited since the turn of the century. This book aspires to tell the story of the western economic crisis that has developed since then through the lens of oil and in doing so connect the present set of economic and political predicaments facing western countries to the older crises of the 1970s. Keywords Oil Á Western economic crisis Á Political economy
For the best part of a century oil has been the material basis of western economic life. It is the single largest source of the world’s energy supply, and more than 90 per cent of the energy used in transportation still comes from oil-based fuels, a proportion that has changed little since the1970s energy crisis (International Energy Agency (IEA) 2013, 510). Now the
threat from climate change has created acute incentives to reduce the use of oil, but at present most renewable energy generation is directed at replacing coal in the production of electricity rather than oil in the transportation sector. Given its huge economic importance, oil is inescapably part of politics. As a limited resource unevenly distributed across the world, oil generates international conﬂicts of interests between states. In a world in which military power came to rest on oil-fuelled ships, submarines, tanks, and aeroplanes, access to oil ﬁelds was fundamental to the geo-political formation of the West in the twentieth century. It in good part explains the rise of the oil-rich United States (US), the ongoing relative military power in the ﬁrst half of the century of an economically declining Britain that had access to oil in the Middle East, and the problems posed to the international order of an economically rising Germany that did not. As Britain’s Secretary of State for the Colonies told the House of Common in 1917, ‘you may have men, munitions and money that you use, but if you do not have oil, which is today the greatest motive power that you use, all your other advantages would be of comparatively little value’ (Quoted in Yergin 1992, 177). Nothing made the geo-political potency of oil clearer than the Second World War. In the age of air power, the ultimate alliance of the world’s two largest oil producers in the US and the Soviet Union against two states in Germany and Japan lacking any domestically-generated oil ensured one eventual outcome. Germany’s only conceivable chance of winning the war was to capture the Soviet oil ﬁelds in Baku on the Caspian Sea and protect the oil it controlled in Romania once it chose to end the Nazi-Soviet pact. Yet Germany could not succeed in taking that chance because the German army simply did not have enough fuel either to capture Baku or defend itself at Stalingrad. Oil also generates acute domestic political problems for states. Oil prices have a large impact on economic growth. Of the recessions that occurred in the US between 1945 and 1982 all but one was preceded by a sharp rise in the price of oil (Hamilton 1983). Since then all three American recessions – 1990–91, 2001, and 2007–09 – came after a substantial oil price shock (Kilian and Vigfusson 2014). The oligopolistic tendencies of the oil sector and the difﬁculties in securing any kind of equilibrium price between the interests of consumers and producers when conditions of both relative scarcity and over-supply can abruptly materialise also create severe domestic distributional conﬂicts in countries where there is signiﬁcant oil production or which are home to international oil
companies. These conditions often allow oil companies the opportunity to exercise signiﬁcant political inﬂuence and can give voters reasons to become suspicious that a political-business elite is price ﬁxing and getting rich on foreign wars. Yet from its onset the subject of political economy has been curiously lacking in perspectives that engage seriously with energy as an economic and political predicament. The ﬁrst political economists, like Adam Smith, treated energy as a free and unproblematic good, supposing that there could be a calculus of economic gain independently of the energy required to transport goods across land and sea or the political power required to keep those trading routes open. Whilst there were economists, especially in the US, in the early twentieth century who made questions of natural resources their fundamental subject matter, they lost the disciplinary argument to both neo-classical and Keynesian scholars who largely ignored them (Mitchell 2013, 131–32). For his part Keynes made aggregate demand the centrepiece of his analytical political economy without any explicit regard for either the impact of energy prices on that demand or the possible impact of geo-political shocks on energy prices, wellattuned as he otherwise was to the power dynamics of international politics. The Keynesians, who in part followed him, were then predictably ﬂummoxed when the oil price shocks of the 1970s generated a simultaneous increase in unemployment and inﬂation, leaving their models of how western economies worked largely irrelevant in the face of the changing balance of power in oil production and the international monetary fallout. Undoubtedly oil in part has made an analytical reappearance in recent years. There has been considerable discussion of the causes of the recent rise and fall of prices (Hamilton 2009; Lutz and Murphy 2014) and the ﬁnancialisation of oil markets (Gkanoutas-Leventis and Nesvetailova 2015; Kaufmann and Ullman 2009). US foreign policy scholars and commentators have also explored the geo-political impact of oil (Morse and Richard 2002; Bromley 2008; Yergin 2012; Blackwill and O’Sullivan 2014). Yet with a few striking exceptions (Hay 2011; DiMuzio 2012; Mitchell 2013) oil has had a very limited place in macro-analysis of the pathologies at work in the present political economy of the West. The discourse of crisis rightly deployed in political economy scholarship since 2008 has focused on one or more of debt (Gamble 2014; Streeck 2014), the ideological victory of neo-liberalism (Blyth 2013; Crouch 2011; Gamble 2014; Streeck 2014), technological and demographic change
(Gamble 2014; Summers 2016), and productivity (Gordon 2016). Strikingly, even those who have extremely insightfully placed the contemporary western economic crisis in a longer temporal crisis going back to the 1970s (Gamble 2014; Streeck 2014) have said rather little about oil in macro-economic and geo-political terms, despite the fact that the two oil price shocks are routinely described in virtually all accounts of the crisis of the 1970s. The relative absence of oil in the macro historiography of the western economic crisis compared either to ideational or other material factors makes little conceptual sense once we acknowledge oil’s place in the underlying material basis of western civilisation without which ideological politics as we know it would not exist. It also makes little empirical sense once we take a look at the visible economic and political world we have inhabited since the turn of the century. Quite conspicuously, the 2008 crash was preceded by a third oil price shock that saw prices reach around $150 a barrel in June 2008, 30 per higher in constant prices than the last peak they reached in 1980. The post-crisis world, meanwhile, has seen a transformation in oil production that has led to a resurgence of American oil production and the world’s largest holder of oil reserves to declare war on the shale industry, throwing into tumult the geo-political axis that has largely guaranteed western oil interests for the past four decades. Both before and after 2008 oil has posed massive problems for central banks and confronted the West with geo-political predicaments from the Middle East to Russia. Without a narrative that gives oil predicaments and their consequences substantial explanatory weight it is impossible to understand the macro-economic landscape and geo-political world that western states now inhabit. This book aspires to tell the story of the western economic crisis through the lens of oil and in doing so connect the present set of economic and political predicaments facing western countries to the older crises of the 1970s. It argues that the stagnation of conventional oil production around 2005 and the rise of non-conventional oil as a response to that material reality has created a Gordian knot of macro-economic and geo-political problems, the fallout of which pose a fundamental challenge to the assumption of progress embedded in western expectations of democracy. Whether or not oil will be eliminated as an energy source in the future in a revolution of solar power and battery technology, as promised by entrepreneurs like Elon Musk, the problems generated by oil as the world’s present premier energy source have had a profound
impact in shaping today’s economic and political predicaments and their legacy will remain for the foreseeable future. (Given the laws of thermodynamics and the enormous federal and state subsidies that Musk’s lossmaking companies consume there is also little reason to think that an alternative future will arise with any alacrity.) In reﬂecting upon the place of oil in the west’s present economic and political problems, I will not engage with the issue of climate change. This omission is not because I in any way wish to minimise the threat that rising carbon emissions pose to the sustainability of human life on this planet. Rather, it stems from the recognition that since the world now consumes 28 million more barrels of petroleum every day than it did in 1992 when the representatives of 166 states signed the United Nations Framework Convention on Climate Change climate change concerns have thus far not made oil less important to western economic life or mitigated the problems oil has generated (US EIA 2016a, 2016b). Explaining the reasons for that failure and the likely consequences of it that would be a different book. Neither do I wish to suggest that oil dependency has only generated problems for the West. Indeed, a signiﬁcant part of the rise of oil consumption since the early 1990s has occurred in non-western countries, not least in China leaving the Chinese economy vulnerable too to oil shocks. I concentrate in this book on oil as an economic and political problem for western states alone because its role in the crisis afﬂicting western economies since 2008 has largely been erroneously ignored. The book begins with the problems oil created for western states in the decade leading up to the 2008 economic crash. Chapter one explains how the stagnation of conventional oil production under the weight of both geological and political pressures at time when the demand for oil from China and India was increasing substantially produced an extremely sharp rise in oil prices. It argues that this oil price shock created a spectre of the return of the stagﬂation of the 1970s and set in motion the recessions that marked the macro-economic side of the 2008 crash. The second chapter considers the rise in supply of non-conventional oil as a response to the pre-crash oil price hike. It shows how the American shale boom was dependent on the monetary environment created by quantitative easing and zero interest rates and all that has come with them, including the perversion of ﬁnancial markets since 2008. It also explains how US shale production produced a counter action from conventional oil producers, and analyses how the consequences of this reaction, which included a sharp fall in oil prices from the middle of 2014, have produced huge
monetary problems for central banks and destabilised the US relationship with Saudi Arabia. The third chapter reconsiders these macro-economic and geo-political problems in light of the oil crises of the 1970s and argues that the underlying causes of these crises have returned over the past decade in a more lethal form. The ﬁnal chapter draws some conclusions about the implications for western democracies and the presumption in western politics that time ultimately guarantees progress.
REFERENCES Blackwill, Robert D., and Meghan L. O’Sullivan. 2014. “America’s Energy Edge: The Geo-Political Consequences of the Shale Revolution.” Foreign Affairs 93: 102–114. Blyth, Mark. 2013. Austerity: The History of a Dangerous Idea. Oxford: Oxford University Press. Bromley, Simon. 2008. American Power and the Prospects for International Order. Cambridge: Polity Press. Crouch, Colin. 2011. The Strange Non-Death of Neo-Liberalism. Cambridge: Polity Press. DiMuzio, Tim. 2012. “Capitalising a Future Unsustainable: Finance, Energy and the Fate of Market Civilisation.” Review of International Political Economy 19: 363–388. Gamble, Andrew. 2014. Crisis Without End? The Unravelling of Western Prosperity. Basingstoke: Palgrave Macmillan. Gkanoutas-Leventis, Angelos, and Anastasia Nesvetailova. 2015. “Financialisation, Oil and the Great Recession.” Energy Policy 86: 891–890. Gordon, Robert J. 2016. The Rise and Fall of American Growth: The US Standard of Living Since the Civil War. Princeton: Princeton University Press. Hamilton, James D. 1983. “Oil and the Macro-Economy Since World War II.” Journal of Political Economy 91: 228–248. Hamilton, James D. 2009. “Causes and Consequences of the Oil Shock of 2007– 08.” Brookings Papers on Economic Activity 1: 215–261. Hay, Colin. 2011. “Pathology Without Crisis? The Strange Demise of the AngloLiberal Growth Model.” Government & Opposition 46: 1–31. IEA. 2013. World Energy Outlook 2013. Paris: IEA. Kaufmann, R. K., and B. Ullman. 2009. “Oil Prices, Speculation and Fundamentals: Interpreting Causal Relations Among Spot and Futures Prices.” Energy Economics 31: 550–558. Kilian, Lutz, and Robert J. Vigfusson. 2014. “The Role of Oil Price Shocks in Causing US Recessions.” Board of Governors of the Federal Reserve System. International Finance Discussion Papers, 1114.
Kilian, Lutz, and Daniel P. Murphy. 2014. “The Role of Inventories and Speculative Trading in the Global Market for Crude Oil.” Journal of Applied Econometrics 29: 454–478. Mitchell, Timothy. 2013. Carbon Democracy: Political Power in the Age of Oil. London: Verso. Morse, Edward L., and James Richard. 2002. “The Battle for Energy Dominance.” Foreign Affairs 81: 16–31. Streeck, Wolfgang. 2014. Buying Time: The Delayed Crisis of Democratic Capitalism. London: Verso. Summers, Lawrence H. 2016. “The Age of Secular Stagnation: What it is and What to Do About it.” Foreign Affairs 95: 2–9. US EIA. 2016a. International Energy Statistics. Accessed on 14 October 2016. http://www.eia.gov/beta/international/data/browser/#/?ord=CR&cy= 2015&v=H&vo=0&so=0ι0&start=1980&end=2015&vs=INTL.44-1-AFRCQBTU.A~INTL.44-1-ASOC-QBTU.A~INTL.44-1-CSAM-QBTU.A~INTL. 44-1-EURA-QBTU.A~INTL.44-1-EURO-QBTU.A~INTL.44-1-MIDEQBTU.A~INTL.44-1-NOAM-QBTU.A~INTL.44-1-WORL-QBTU.A&s= US EIA. 2016b. “Short-term Energy and Winter Fuel Outlooks.” https://www. eia.gov/forecasts/steo/report/global_oil.cfm. Accessed on 14 October 2016. Yergin, Daniel. 1992. The Prize: The Epic Quest for Oil, Money and Power. London: Free Press. Yergin, Daniel. 2012. The Quest: Energy, Security and the Remaking of the Modern World. revised and updated. London: Penguin.
The Spectres of Peak Conventional Oil and Stagﬂation
Abstract From 2001 to mid-2008 the price of oil rose from around $25 a barrel to around $150. This escalation of oil prices reﬂected both new demand in a world where the Chinese and Indian economies were enjoying high levels of growth and the apparent stagnation of conventional oil production from 2005. The ensuing difﬁculties of high-cost oil were exacerbated by the weakness of the dollar in a world in which the US in the ﬁrst half of the decade had turned to China as a structural creditor and by increased volatility in oil markets as those markets became increasingly subject to speculative capital ﬂows. The consequence of these pressures was a cumulative set of macro-economic and geo-political difﬁculties for western states. These macro-economic difﬁculties were central to the recessions that began in western economies in 2007–08 even whilst central banks focused as much attention on the inﬂationary pressure the oil price rise created. Meanwhile the geo-political difﬁculties left the US increasingly unable to exercise inﬂuence in the Middle East where the majority of the world’s conventional oil supply remained. In this sense the 2008 economic crisis was much more than a crisis generated by western ﬁnancial sectors. It was also a crisis arising from the resource basis of western economies. Keywords Oil Á Conventional oil Á China’s rise Á The Middle East Á 2008 crash Á Conventional oil production
In December 2001 the price of oil stood at $26 a barrel.1 By May 2004 it had risen to $50, its highest inﬂation-adjusted level since the autumn of 1990 during the Gulf war. In July 2005 it rose above $70, in April 2006 above $80, in September 2007 above $90, and in November 2007 above $100. In June 2008 the price peaked at $151. This escalation of oil prices reﬂected both new demand in a world where the Chinese and Indian economies were enjoying high levels of growth and the apparent stagnation from 2005 of conventional oil production. The ensuing difﬁculties of high-cost oil were exacerbated by the weakness of the dollar in a world in which the US in the ﬁrst half of the decade had turned to China as a structural creditor and by increased volatility in oil markets as those markets became increasingly subject to speculative capital ﬂows. The consequence of these pressures was a cumulative set of macro-economic and geo-political difﬁculties for western states. These macro-economic difﬁculties were central to the recessions that began in western economies in 2007–08 even whilst central banks focused as much attention on the inﬂationary pressure the oil price rise created. Meanwhile the geo-political difﬁculties left the US increasingly unable to exercise inﬂuence in the Middle East where the majority of the world’s conventional oil supply remained. In this sense the 2008 economic crisis was much more than a crisis generated by western ﬁnancial sectors. It was a crisis arising also from the resource basis of western economies.
NEW DEMAND Total world oil consumption began to grow in the middle of the 1990s. In 1994, a year when all the G7 economies were growing and all of them except Japan at an annual rate of more than 2 per cent, oil consumption stood at 69 million barrels per day (bpd) (World Bank 2016). By 2003 it had risen to 80 million bpd and by 2008 to 86 million (US Energy Information Administration (EIA) 2016a). Indeed, in the period between 2002 and 2005 it increased twice the rate it had done over the previous four years. Most of this increased demand for oil came from China and India. India’s consumption rose by 106 per cent between 1994 and 2008 whilst China’s grew by 152 per cent. Almost a third of China’s increase occurred between 2001 and 2006. In 2004 China consumed 859,000 more bpd than it had done the previous year (US EIA 2016a). During the ﬁrst half
THE SPECTRES OF PEAK CONVENTIONAL OIL AND STAGFLATION
of the 1990s China also became dependent on world oil markets. Prior to 1993 the Chinese economy produced more oil than it consumed but by 2004 domestic production represented only 48 per cent of consumption (US EIA 2016a). The total volume of China’s oil imports rose more than ﬁvefold from 1992 to 2008, increasing 55 per cent between 2001 and 2004 alone (US EIA 2016a). The contribution of China and India to the overall rise in demand from the mid-1990s to 2008 can be seen by comparing these countries’ oil consumption with that of the G7 economies during the period. For Japan and Britain the peak consumption year was 1996, for Germany and Italy 1998, for France 2001, for the United States (US) 2005 and for Canada 2007. Indeed, annual oil consumption over this period fell by 10 per cent or more in Germany, Italy, and Japan and marginally in Britain. Only in Canada was there a signiﬁcant rise in consumption of 32 per cent (US EIA 2016a). Put differently, of the increase of 17.9 million bpd in oil consumption that materialised between 1994 and 2008 only 960,000 of the total came from the G7 economies. This huge increase in China and India’s oil consumption was driven by high levels of economic growth. The Chinese economy grew at an average rate above 10 per cent between 1994 and 2008, and between 2003 and 2007 the overall size of the economy grew by around 60 per cent. For its part, India saw an average growth rate of 6.9 per cent between 1994 and 2008 and 8.9 per cent between 2003 and 2007 (World Bank 2016). Nonetheless, the relationship between China’s growth and energy consumption from the 1990s to 2008 was complex. Unusually for a developing country, the Chinese economy prior to 2000 grew at twice the rate of energy consumption. Then from 2000 the rate of increase in Chinese energy consumption began to outstrip growth. This change was primarily the product of sharp increases in electricity consumption and coal usage (Shealy and Dorian 2007, 2–3). Yet oil was also beginning to play a part. In 2000 and then again in 2004 China’s annual oil consumption increased at a more rapid rate than growth (World Bank 2016; US EIA 2016a). Consequently, looking forward the rapid growth in Chinese demand for oil in the mid-2000s appeared to be only in its infancy. This demand-side shock to oil markets demarcated the price hike of 2002 to mid-2008 from those that had happened in 1973–74, 1979–80, 1990, and 1999–2000. Whilst the earlier episodes of high oil prices were fundamentally driven by supply side issues, this period of escalating oil costs had causes clearly rooted in demand as well as supply. Moreover, this
demand-side shock was structural and ongoing. Without a growth crisis in China or India, demand for oil would continue to grow. Confronted with this reality, the International Energy Agency (IEA) (2007, 42) calculated in 2007 that on conservative assumptions, in which Chinese average growth fell to around 5 per cent between 2015 and 2030, world demand for oil in 2030 would be more than a third higher than in 2006. In this ‘Reference Scenario’ projection for 2030, China and India’s overall primary energy demand would more than double, transportation-led demand in China would rise nearly fourfold, China’s oil import dependency as a proportion of total consumption would rise to 80 per cent, and India would become the world’s third largest importer of oil (IEA 2007, 44–46, 62). Put differently, by 2030 China and India’s oil imports would, according to the IEA, be higher than the combined imports of the US and Japan in 2007 (IEA 2007, 48). Under these demand conditions high oil prices appeared to be becoming a permanent reality unless there was a radical increase in supply. However fast prices rose, it seemed in the short term they could rise faster still. In November 2007 the IEA (2007, 43) noted ‘recent highs of over $75 per barrel’, and projected a fall in prices ‘to around $60 (in year-2006 dollars) by 2015’ on the basis of production and reﬁning capacity rising marginally faster than demand and then a slow recovery ‘reaching $62 (or $108 in nominal terms) by 2030’. In reality the nominal price took until April 2008 to reach $108, and the inﬂation adjusted one was over $140 but two months later. The explanation for the ﬁnal upswing in prices before the oil crash that began in July 2008 went beyond any immediate surge in demand in China and India. Yet one underlying problem was clear. If this rapid hike could happen before China and India’s oil demand escalated, then the oil market two-and-a-half decades hence appeared terrifying.
SUPPLY STAGNATION As demand for oil from China and India began to rise in the mid-1990s, supply initially rose. Between 1994 and 2000 total supply grew from 68.6 million bpd to 77.7 million. Thereafter the increase in production slowed down, even though demand was rising more rapidly in the mid-2000s than in the 1990s. Between 2002 and 2007 annual consumption outstripped annual production in 2002, 2003, 2006 and 2007. Indeed, in
THE SPECTRES OF PEAK CONVENTIONAL OIL AND STAGFLATION
2007 production fell and the world’s economies consumed 1.7 million bpd more than they produced (US EIA 2016a). The causes of this supply stagnation were in signiﬁcant part geological. By the late 1990s two fundamental physical constraints on supply were evident. First, world oil discoveries had peaked in 1963 (Heinberg 2005, 114). Of the world’s 20 largest oil ﬁelds operating in 1999 the last to be discovered were Azeri-Chirag-Gunashli in Azerbaijan in 1985, Priobskoye in Russia in 1982 and Cantarell in Mexico in 1977. The remaining 17 were found in a four-decade period between 1928 and 1968 (IEA 2008, 226). At the macro level, the annual discovery rate for most of the 1990s was no more than half what it had reached even in the middle of the 1980s (Crooks 2015). This fall in the rate of discovery occurred despite the fact that the high prices of the 1970s and 1980s had ﬁnanced substantial new exploration (Campbell and Laherrère 1998, 81). As a consequence, the world’s economies were consuming three times more oil each year by the 1990s than was being discovered (Campbell and Laherrère 1998, 80). Second, by the turn of the century production on most of the world’s biggest ﬁelds was either declining or would soon decline. Of the top ten ﬁelds, seven had passed their peak by 1998 and of the next ten, a further seven were also on a downward slope of output. These 20 ﬁelds produced a quarter of the world’s oil (IEA 2008, 225). The geological pessimism about future supply generated by these structural issues led to renewed interest in Marion King Hubbert’s (1956) analysis of the physical limits of oil production. In 1956 Hubbert had predicted that the production of crude oil in the US would peak between 1966 and 1972. When American oil production did peak in 1970 Hubbert’s model of a bell-shaped production curve appeared vindicated. In the late 1990s a number of geologists, the most inﬂuential of whom was Colin Campbell (2004; Campbell and Laherrère 1998; Aleklett and Campbell 2003) adapted Hubbert’s model to world production. This interest in Hubbert’s work led to a spate of commentary about impending peak oil (Deffeyes 2003, 2005; Heinberg 2005; Simmons 2005). These peak oil analysts argued that by the end of the ﬁrst decade of the twenty-ﬁrst century the supply of conventional oil would begin to taper off, leaving supply short-falls and very high prices. Certainly some analysts of the oil market responded to these claims with scepticism (Holland 2008; Lynch 2003; Yergin 2012, 229–43). But by the middle of the 2000s supply side issues and rising prices ensured that
there was plenty of discussion of peak oil arguments in the American economic media (Holland 2008, 61). Moreover, these arguments increasingly resonated in western policy-making circles, especially in the US. For example, Matthew Simmons (2005), the author of a book titled Twilight in the Desert: The Coming Saudi Oil Shock and the World, had served as an energy advisor to George W. Bush during Bush’s ﬁrst administration. Simmons told the American Association of Petroleum Geologists in June 2001 that ‘a simple check of the facts quickly reveals that almost every scrap of spare energy [production] capacity around the globe is now either gone or just about to disappear’ (Quoted in Heinberg 2005, 110). In the same spirit the US Department of Energy published a report at the start of Bush’s second administration, known as the Hirsch report, that began by stating that ‘even on optimistic forecasts world oil peaking would occur in less than 25 years’, presenting ‘the US and the world with an unprecedented risk management problem’ (Hirsch et al. 2005, 13, 4). Whatever the persuasiveness or not of the argument that oil production was reaching a geological peak, – and the claim would have been more accurately rendered as an approaching peak of conventional oil production – the anxiety generated in the West by the supply issues that were palpably already in play by the late 1990s were compounded by a set of geopolitical issues around the geography of oil production and its political reliability. In the 1980s and ﬁrst half of the 1990s total western oil production had risen, driven primarily by new supply capacity in Alaska and the North Sea. But from the second half of the 1990s it began to fall. Between 1990 and 1995 total oil production in the US, Canada, Britain and Norway rose from 15.4 million bpd to 17.6. It then peaked in 1997 at 18.2 million and had fallen to 17.7 million by 2000 (US EIA 2016a). In the case of the US, Alaskan production peaked as early as 1988 and by 2000 daily production had fallen by 50 per cent from that height (Alaska Oil and Gas Conservation Commission 2015). As a result, half of American oil consumption by 1995 came from imports (US EIA 2016a). In the North Sea Norwegian production peaked in 2001 and British production in 1996. By 2008 Norwegian production was nearly one million bpd below its peak and British production two million. Only in Canada did production in the West continue to rise after 2001 through non-conventional production from the tar sands in Alberta. In 2000 Canada produced 600,000 bpd of tar sands oil, representing 22 per cent of Canada’s output. By 2005 this production had risen to 1 million, constituting a third of Canada’s total output (IEA 2006, 92; US EIA 2016a).
THE SPECTRES OF PEAK CONVENTIONAL OIL AND STAGFLATION
Looked at in terms of reserves, the supply picture was even less propitious for western states. In the estimates of reserves in 2000 made by the IEA (2001, 49–52), the US was the only western economy to feature in the top ten countries and Canada did not appear in the top 20 because of doubts about the economic viability of extracting ultra-heavy oil and tar sands. Indeed, the IEA reported, more than 50 per cent of proven reserves lay in Saudi Arabia, Russia, Iraq, and Iran (IEA 2001, 49). Each of these non-western states either confronted political limits on production and/or posed political problems to the West as suppliers of oil. Through the 1990s the US had directly constrained oil production in two of the three Middle Eastern states by sanctions. In the case of Iran, the ﬁrst Clinton administration and Congress had extended the sanctions put in place after the 1979 revolution to include a ban on the involvement of any American ﬁrms in the Iranian oil sector and a mechanism for action against non-US companies investing more than $20 million. Consequently, whilst Iranian oil production had increased from 2.3 million bpd in 1988 during the last year of the Iraq war to 3.7 million by 1995, production fell again in the second half of the 1990s, standing at 3.6 million in 1999 (US EIA 2016a). In the case of Iraq, the Bush Sr administration had imposed sanctions prohibiting trade with the country after Iraq’s invasion of Kuwait. These sanctions largely destroyed Iraqi production in the ﬁrst half of the 1990s with output falling from around 3 million bpd a day in 1989 to 600,000 in 1996. In the second half of the decade the United Nations (UN) authorised the Oil-for-Food programme, which allowed Iraq to sell oil in exchange for food and medicine and to make reparation payments to Kuwait. Although this relief led to a sharp increase in production, by 2000 production stood still below what it had been before the ﬁrst year of sanctions at the end of the 1980s (US EIA 2016a). Certainly, the US’ economic and political relationship with Saudi Arabia was an entirely different proposition. Economically and militarily, Saudi Arabia was an American and western ally. Nonetheless, the direct inﬂuence of western states and oil companies on Saudi production was extremely limited. As in Iran and Iraq, no foreign company was allowed to explore for, or develop, oil except as a sub-contractor or supplier of technical services to the state-run Saudi Aramco (IEA 2008, 335–36). Moreover, after the Bush Sr administration had expanded American military bases in Saudi Arabia during the Gulf War the relationship between the House of Saud and the US had become a become a potential source of political instability in the country capable of generating guerrilla attacks on oil installations (Klare 2005, 87–88).