The global economy is set to start shrinking as the supply of oil goes into decline. Big business will fight ruthlessly to protect their share of the pie.
By Ryan McGreal
Published October 06, 2006
I've long been concerned with developments south of the border, but in the past I consoled myself that America has flirted with domestic fascism before and eventually righted itself.
This time it may be different: for the first time, the long global trajectory of economic growth is on the cusp of a permanent reversal.
Even during the darkest days of WWI, the Great Depression, WWII, and the Cold War, the world was getting richer, the total global production and consumption of energy was increasing, and "Progress" (with a capital P) still seemed the order of the day. These crises were seen as the last great lurches of a dying imperial order that had run its course and grown unstable.
Even the Great Depression was seen mainly as a misguided overreaction to the bursting of a vast financial bubble that had not yet been subjected to the sophisticated regulatory tools that today allow people like US Federal Reserve Chairman Ben Bernanke to wield godlike powers.
Through all this, global economic output grew steadily as the net flow of usable energy increased at around two or three percent a year. It was easy to struggle for universal civil rights when there was enough energy to go around and you didn't need slaves, serfs, or sharecroppers anymore.
It was comparatively easy to struggle for social justice. For the first time in history, there was plenty to go around. Poor, unbearable shanties in the rural South suddenly became livable, thanks to air conditioners and motor vehicles, all powered by cheap, abundant fossil fuels. Rotting northern industrial cities emptied into their hinterlands, levelled and paved and bristling with new single houses.
The movement to universalize the basic trappings of modern life gained traction, and with the infrastructure of Roosevelt's New Deal in place, corporate America signed onto a bargain in which industry reluctantly accepted full employment policies and high wages in exchange for steady growth.
Then, starting in the 1970s with the OPEC oil shocks, North American industries and their lobbying groups and think tank "institutes" went on the offensive, fighting back against egalitarianism and steadily clawing away at the gains the social justice movement had achieved.
Over the next three decades, big business pressure slashed corporate taxes, froze minimum wages, rolled back unionization, and cut budgets for education, health care, and public infrastructure.
In that period, nearly all the wealth increases have gone to the top ten percent of Americans, of whom the top one percent has taken the largest share. Executive salaries have soared, while the size of the poor underclass has grown, eating into the middle class while median incomes have stalled and declined.
Today, cities are crumbling, public schools struggle with inadequate resources, and in the US, some 47 million people have no comprehensive health care coverage. When the next big recession hits, the basic protections built up over half a century will no longer exist.
At the same time, elections have turned into hundred million dollar extravaganzas of public manipulation. What used to be considered influence peddling has been normalized in the US Congress, with "registered" lobbyists and overt corruption.
Since 2000, if you exclude the booming health care industry, the net change in employment in the private sector has been strongly negative.
The boom in home construction, fueled by the housing bubble that grew out of Alan Greenspan's rock-bottom interest rates early in the decade, has produced some low-skilled construction jobs. However, that has not been enough to counteract the net decline in manufacturing work.
Even the much-ballyhooed "information economy", which was supposed to replace manufacturing jobs with a new generation of high-skilled tech jobs, has generated almost zero net jobs since the tech bubble burst in 2000.
The US federal government is hemorrhaging around three hundred billion dollars a year, plus deficits at the state and municipal level. This year, the US economy will import close to $800 billion more in goods and services than it exports.
In an ominous echo of the 1998 collapse of Long Term Capital Management, another hedge fund has just failed. Amaranth Advisors, Inc. pulled the plug after a month-long collapse, losing $6 billion dollars. Banks are scrambling to insulate themselves from the fallout, but this is another sign of growing volatility.
Ironically, Amaranth collapsed because a trader bet that natural gas futures for March-April 2007 would continue to rise. Instead the futures share price dropped by four-fifths on the strength of a mild hurricane season and reports of a warm winter.
In the context of this volatile political milieu, consider the effects of peak oil, the period at which half the world's conventional petroleum reserves have been consumed. After the peak, total oil production goes into an inexorable decline.
Many geologists believe the peak is happening now, and point as early evidence to the fact that this year's total global oil production has fallen compared to last year's, for the first time since the 1970s.
While the earlier production declines were political - the first because OPEC cut production, and the second because Iran overthrew its government and stopped oil production - today's decline is geological.
When the total output of oil is growing, we can trust market forces to allocate that oil more or less fairly. When the total output is shrinking but the world's largest buyer refuses to pay the scarcity premium or consume less, then it must circumvent the market and secure a steady supply by force - and to hell with the rest of the world.
The price of oil has risen steadily since its 1999 low of $18 per barrel to a high of $75 per barrel in mid-2006 because demand has grown steadily but production could not increase to match it. Reserve margins in the oil industry fell to zero over this time, and even Saudi Arabia, the world's oil producing powerhouse, admits it has passed its production peak.
Lately, high prices have destroyed some of the demand for oil, particularly in poorer countries, and investors fear that the US will go into a recession next year, so the price has fallen near $60 per barrel, which feels like a break today but is still over three times higher than in 1999.
Cornucopian economists will point to today's falling prices as proof that there's no oil shortage and that the market works just fine, thank you very much. However, peak oil theory actually predicts several years of exactly this kind of price volatility as the production ceiling repeatedly destroys demand via high prices.
When the demand drops, the price falls; the lower price, in turn, restores a demand that the physical capacity of the oil industry cannot meet. Each time demand bounces off the global peak in production, the new baseline of wealth will be a little lower than before, the security of the middle class less certain, the desperation of the poor more acute.
This bodes very badly for struggling people the world over. If big business fought back fiercely against public spending when economic growth merely slowed, how fierce and unrelenting will they be once the economy actually starts to shrink in real terms?
How hard will they push the government to repress and resist the social justice movement when that pie starts shrinking?
We already face attempts to tie the social justice and environemental movements to the so-called War on Terrorism. If domestic resistance to US policy escalates beyond timid protests, apolitical unions, and "free speech zones", will the US government be able to resist characterizing protests as terrorist acts?
When there's plenty of food to go around, enough is left to toss some scraps to the hounds to keep them happy. But when there's not so much to go around and there are no scraps, you have to beat the dogs to keep them quiet. Once they become too desperate and unruly to silence with threats and repression, you have to kill them.
I fear we're in for ugly times ahead.
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