Why we’ll all be better off when the commodities curse is dispelled

The existence of substantial fossil fuel resources in a country has often proved a curse for its population, says Max King. The end of the oil era will be a blessing for many – and for the global economy as a whole.

The Arab oil embargo on exports to the West which followed the 1973 Yom Kippur War, made oil exporters realise the enormous economic power that they wielded. 

The Organisation of Petroleum Exporting Countries (Opec), dominated by the Middle Eastern producers, became a cartel which quadrupled the price of oil, exacerbating inflationary pressures in the West and leading to an economic downturn. 

More worrying still was the longer-term prognosis.

We’re no longer worried about running out of oil

During the oil crises of the 1970s, proven oil reserves were enough to last only 25 years, while demand was rising inexorably. With Opec in control of supply, the price could only spiral higher, pulling up the price of coal, on which the UK depended for 70% of its electricity generation, in its wake. 

The good news was that higher oil prices encouraged greater efficiency of usage and the discovery of new non-Opec reserves of oil and gas, notably in the North Sea. However, economic growth pushed up demand and hence Opec’s influence continued to grow. This and the Iran-Iraq war caused prices to quadruple again in 1980, reaching $35 a barrel, though the glut which ensued resulted in prices dropping back in 1986. 

The stranglehold that Opec had over the global economy seemed to have gone, allowing almost uninterrupted economic growth till the millennium.

Thereafter, the problem re-emerged. Though proven reserves had risen to around 50 years’ worth of consumption, fears grew of an imminent peak in oil production. With demand growing at 1.5% a year, higher prices seemed inevitable. In 2008 they approached $150 a barrel. 

The financial crisis caused them to crash but just three years later, the price had recovered to $100 and was trending higher. Then, in 2014, came another crash, since when, barring last year’s temporary drop, the price has oscillated around $60 a barrel.

Why does the long-term trend appear to have been broken? Supply has continued to increase as improved technology and fracking have opened up new oilfields and increased extraction rates, but there have been no major new discoveries for decades. Demand growth has steadily decelerated to below 1% a year, helped by more efficient usage. 

More importantly, the relentless growth of renewable energy is encouraging expectations of “peak demand,” a full reversal of the post-millennium “peak oil” thesis. The quip made by Sheikh Yamani, the Saudi oil minister in the 1970s, looks prophetic: “the stone age didn’t end for lack of stone and the oil age will end long before the world runs out of oil”.

This growth in renewable energy generation is being encouraged by falling costs, which, in turn, is expected to push down energy prices. Bloomberg New Energy Finance forecasts that power prices in the UK will fall from £43 per MWh in 2022 to £16 in real terms (ie, taking inflation into account) in 2030 as renewable energy output continues to grow. 

This should result in a significant shift from fossil fuels to electricity in transport, the home and industrial processes. For those who were brought up to assume an endless upward spiral in energy prices, it is a remarkable change. 

Why the end of the oil era is excellent news for the global economy

This is good news, surely, for energy-consuming countries, but bad news for producers – and hence will have little overall impact on the global economy.

Far from it. Possession of substantial fossil fuel resources has proven to be not a blessing but a curse around the world. Nigeria, Iran, Iraq, Venezuela, Libya and Algeria have derived no lasting benefit. Saudi Arabia’s oil has enriched an elite who have spent their wealth on conspicuous consumption, repression and wars. 

The Russian, Brazilian and Mexican economies have lapsed into stagnation and the economic benefit to countries who have managed their luck better is doubtful – arguably, the growth of fracking has made the US economically complacent.

The reason is simple: the fruits of resource wealth flow to governments and their cronies, where it is dissipated in corruption, the military, white elephant infrastructure projects and untold riches for the few, none of which stays at home. 

Even the better-governed countries suffer from what came to be known as “Dutch disease” after the discovery of natural gas in the North Sea. The resulting inflow of capital and revenue drives up the value of the domestic currency, encourages imports, and results in other exports becoming more expensive. 

It is not a coincidence that most of the world’s most successful economies, including Japan, South Korea, Switzerland, Singapore and Germany have virtually no natural resources. A lack of natural resources does not guarantee prosperity – but it does force their governments, if committed to prosperity, to rely on human ingenuity. 

The result of this is that a succession of oil crises have drained wealth from prosperous, efficient economies and given it to corrupt and incompetent governments. Power attracts the corruptible, and oil wealth makes government a magnet for greedy megalomaniacs. 

This transfer of wealth from productivity-enhancing to productivity-sapping countries has been a drag on human prosperity for 50 years. If renewable energy and associated technological advances brings the oil age to an end and reverses the treadmill of prosperity-sapping rises in energy costs, it will bring a massive economic benefit to the world.

Strangely, the usual justification for renewable energy is based solely on the environmental benefit, deemed to constitute a “climate emergency” which it is worth paying any price to avoid. This does not have to be true to make the energy revolution the most important technological advance in the last 50 years.

Recommended

The charts that matter: the Fed springs a surprise
Global Economy

The charts that matter: the Fed springs a surprise

As the US Federal Reserve turns hawkish on inflation, we look at how that’s affected the charts that matter most to the global economy.
19 Jun 2021
Is the commodity bull market already losing steam?
Commodities

Is the commodity bull market already losing steam?

Commodities have put in a blistering performance over the past year. But – oil aside – the commodity bull market looks like it might have peaked. Domi…
16 Jun 2021
Climate activists are missing the point on big oil companies
Energy stocks

Climate activists are missing the point on big oil companies

Forcing big oil companies like Shell to dump their oil and gas assets isn’t the positive step many people think it is, says Merryn Somerset Webb.
15 Jun 2021
Anglo American’s coal spin-off Thungela Resources fails to catch fire
Stockmarkets

Anglo American’s coal spin-off Thungela Resources fails to catch fire

Investors have turned their noses up at Thungela Resources, the London-and-Johannesburg-listed South African coal business spun out of Anglo American
11 Jun 2021

Most Popular

The real problem of Universal Basic Income (UBI)
US Economy

The real problem of Universal Basic Income (UBI)

April employment numbers showed 75 per cent fewer people in the US returned to employment compared to expectations. Merryn Somerset-Webb explains how …
1 Jun 2021
The biggest threat to crypto comes from stablecoins
Bitcoin & crypto

The biggest threat to crypto comes from stablecoins

Governments are increasingly getting worried about "stablecoins", cryptocurrencies which have a more "stable value". John Stepek explains what stablec…
3 Jun 2021
Why it might be better to delay saving for your retirement
Pensions

Why it might be better to delay saving for your retirement

We are advised to put aside as much as we can as early as possible. But is that always sensible?
8 Jun 2021