Oil, Inflation, and War
Oil hit a $100 a barrel last week, touching a $140 last night. The price of oil first hit a $100 in 2007, preceding and in some ways precipitating the financial crisis of 2008. When oil hit a hundred, the US economy went into recession in the last quarter of 2007. Oil continued its rise all the way to $150 a barrel in summer of 2008, then everything crashed.
With the crashing of the global economy, oil dropped into the $30s by February, 2009. Over the next few months, as the global economy lay mired in recession, the oil powers that be, or were, depending on your view, pushed the price back up into the $70s. Over next year and half, the price slowly rose. From the end of 2011 to the end of 2014, oil was right around $100. The economy huffed and puffed, helping to exponentially increase American shale drilling. At the end of 2014, shale volume began relieving global oil supply pressures. It's very important to add with oil at $100 a barrel during this time, the shale industry made little or no money.
As shale volumes rose, the price of oil fell, staying in a relatively moderate price range of $40 - $70 for a half dozen years, ending last year as oil prices began their most recent ascent to $100. This recent surge started before, but has been severely aggravated by the Russian invasion of Ukraine. Once again, world oil supplies are tight, as in worse than pre-shale tight. If you take away two or three million barrels of Russian oil exports, it'd be very difficult to make up anywhere else, and it certainly would not be cheap.
In this regard, we get some wonderful comments from Shale Revolutionary CEO Scott Sheffield. Boy, American politicians are not castigated nearly enough for the idiocies they continually spew, but phew, our so-called business leaders freely and unaccountably say whatever stupid thing they want. Sheffield says,
“The only way to stop Putin is to ban oil and gas exports,” Sheffield told the Financial Times in an interview on Friday. "[But] if the western world announced that we’re going to ban Russian oil and gas, oil is going to go to $200 a barrel, probably — $150 to $200 easy.”
$200 a barrel certainly be something to see, maybe the Climate people would find common ground with the Shale Revolutionaries? Even better, America's great ally in the Middle East, the latest House of Saud oil crown prince responding to Joe Biden states, “Simply, I don't care,” what he thinks. With friends like this...
History flows across innumerable interacting currents. Many flow relatively shallow and weak for a few years. Others flow for decades, some for centuries, and others flow for millennia. The older the historical current, the deeper and stronger it flows. The availability of cheap and plentiful oil, to what has always been only a minority of the global population, is a strong current flowing for over a century and half. It has carved massive changes across the planet's landscape, economy, and politics. In the last half century, the availability of cheap oil grew increasingly precarious, resulting in ever greater turbulence.
This oil current once again helped instigate another inflationary era. All inflationary eras are different, their causes include factors of various historical breadth. The last inflationary era in the United States was in the 1970s, factors included; unchecked war spending, the first “oil shocks,” and the beginnings of the processes of American deindustrialization. In response, the US dealt with none of these factors, instead choking the money supply, causing a severe recession. Over the long term, the response to this last inflation resulted in an ever greater number of Americans incapable of participating in the great consumption cornucopia known as the “American Dream.” For an ever increasing number, a dream is all it will ever be.
By the last decade of the 20th century, a new deflationary era began. Just like inflation, deflation eras are all different. The factors for this one included the breaking of labor costs with globalization and automation, and the last of the world's big traditional oil reserves coming online, most importantly Alaska and the North Sea. In 1998 and 1999, oil was down to $10 a barrel, a good time was had by all.
Beginning in the late 1990s this new deflation era — the previous deflation era having been the boom of the 1920s and Depression of the 1930s — became more severe with the bank collapse of 2008. Just as underlying economic causes to the 1970s inflation were never addressed, so too deflation was met with a purely monetary response. The Federal Reserve pumped trillions of dollars, while simultaneously Federal government debt tripled to $30 trillion today. Private and corporate debt exponentially soared, including hundreds of billions for the Great Shale Revolution.
As money poured into the greater economy, oil supplies once again gradually tightened. Production in many older oil fields declined, such as Mexico (50% decline in less than 20 years), and others more recent, like Alaska and the North Sea. Simultaneously, the corporate globalization model of the past half-century sputters. A new inflation era begins.
The latest inflationary catalyst is the war in Ukraine, a centuries old historical current fiercely moving. War is always inflationary. The very fine journalist Aaron Mate has a nice piece on the background of this war. Raise your hand if you know it's been going on for eight years and the American military industrial complex has poured billions in weaponry into Ukraine over this time. It's in very few interests for this war to continue, absolutely in nobodies' for it to escalate.
Fast and deep, historical currents are moving.