Oil and the western economic crisis (building a sustainable political economy SPERI research policy)

Building a Sustainable Political
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Helen Thompson

Oil and the Western
Economic Crisis


Helen Thompson
University of Cambridge
Cambridge, United Kingdom

Building a Sustainable Political Economy: SPERI Research & Policy
ISBN 978-3-319-52508-2
ISBN 978-3-319-52509-9 (eBook)
DOI 10.1007/978-3-319-52509-9
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To John Dunn, who quite rightly insisted that I should try to think
seriously about politics


PREFACE

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


viii

PREFACE

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.


CONTENTS

1 Introduction

1

2 The Spectres of Peak Conventional Oil and Stagflation

9

3 Salvation and Damnation: The Rise of
Non-conventional Oil and Quantitative Easing

47

4 Revisiting the 1970s

93

5 Conclusions

107

Index

115

ix


LIST

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

OF

ABBREVIATIONS

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

xi


xii

LIST OF ABBREVIATIONS

QE
SMP
UK
UN
US
ZIRP

Quantitative easing
Securities Markets Programme
United Kingdom
United Nations
United States
Zero interest rates policy


CHAPTER 1

Introduction

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

© The Author(s) 2017
H. Thompson, Oil and the Western Economic Crisis,
Building a Sustainable Political Economy: SPERI Research & Policy,
DOI 10.1007/978-3-319-52509-9_1

1


2

H. THOMPSON

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


INTRODUCTION

3

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


4

H. THOMPSON

(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

INTRODUCTION

5

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


6

H. THOMPSON

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.

INTRODUCTION

7

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.
/>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.


CHAPTER 2

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

© The Author(s) 2017
H. Thompson, Oil and the Western Economic Crisis,
Building a Sustainable Political Economy: SPERI Research & Policy,
DOI 10.1007/978-3-319-52509-9_2

9

10

H. THOMPSON

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

11

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


12

H. THOMPSON

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

13

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


14

H. THOMPSON

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).


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15

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).