A fuel’s paradise: capitalism, energy crises and the markets 

By https://www.rs21.org.uk/

 Brian Parkin


20 March 2023

The last year has seen gas and electricity prices rocket. We’re told that this is because of shifts in global markets, resulting from factors like Covid and Russia’s invasion of Ukraine. But why are global fuel markets so unstable in the first place? Here Brian Parkin explains the relationships between fossil fuel companies and national governments, and how they drive nations to war and underlie the climate catastrophe that threatens us all.

Oil refinery in Corus Christi, Texas – photo by Carol J Highsmith used under CC licence

Capitalism is a global system, where both companies and states compete in a world market. Companies often have links with the states where they are based, so that economic competition between companies becomes inseparable from political and military competition between states. This stage of capitalism, imperialism, has existed for over a hundred years. Fossil fuels have long been central to capitalism – first coal, which powered the steam-driven technologies of the nineteenth century, and now oil and gas, which are essential to transport, energy generation, chemical production and so on. Because raw materials like fossil fuels are so central to capitalism, states will go to war over access to them. And to this, add the fact that capitalism is an inherently instable system, that goes through periodic booms and crises.

After the Second World War: Imperialism and OPEC

In the post 1945 world it was clear that access to oil was vital to the growth of a nation’s economy. With large oil reserves, the USA enjoyed energy self-sufficiency. But it was also one of two super-powers, in need of strategic advantages over the Soviet Union and its Cold War subordinates. For this reason, it appointed itself the watch-dog over the oilfields of the Middle East through the ‘Great Bitter Lake Agreement’ of 1945. This deal, struck between FD Roosevelt and the Saudi royal family, provided a permanent guarantee of US military support for the Saudi rulers in exchange for guaranteed access to Saudi oil. These oil fields supplied petroleum for much of western Europe, and so this US protection racket further tied this region into the NATO alliance and western capitalism.

Britain and France, meanwhile, pursued their own imperialist oil projects. Britain controlled Iran’s oil industry through the Anglo Iranian Oil Company. When the company was nationalised in 1952 by Mohammad Mosaddegh, the elected Iranian prime minister, Britain worked with the CIA to topple him in a coup the following year – after which the Anglo Iranian Oil Company became British Petroleum or BP. In 1956 Britain and France made a failed attempt to stop the Egyptian government nationalising the Suez Canal – the ‘Suez Crisis’ – which was the main route for oil tankers from the Persian Gulf to Western Europe.

Up to 1960 a competitive oil market barely existed. The major oil companies operated as a cartel known as the ‘Seven Sisters’, which fixed the price of oil based on operational costs and production costs, plus any profit margin they fancied at the time. As long as this price was affordable by both industrial and domestic markets, the arrangement continued.

The coup against Mosaddegh and the Suez Canal fiasco alarmed other governments which had nationalised their oil and gas reserves to avoid the predatory whims of the mainly western oil companies. In 1960 five countries – Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela – established their own counter-balancing cartel, the Organisation of Petroleum Exporting Countries (OPEC), which has since expanded to 16 members. Meanwhile, the Western European consumer states became able to bypass the Suez Canal by means of 200,000 tonne ‘Cape size’ super-tankers, capable of carrying oil cargoes all the way around the southern tip of Africa. The costs of such tankers were huge, but such spending was viable when, in just one decade, world oil consumption had more than doubled.

North Sea oil, Vietnam and the Petrodollar

Exploration of North Sea oil and gas had already begun by the 1960s – one story, alas unsubstantiated, tells how gas deposits were discovered in 1962 when a Dutch household woke up one morning to see their flowerbed on fire. In any case, geological surveys went on to show that Britain possessed billions of tonnes of oil and gas in its North Sea territorial waters, while gas resources – more modest, but still commercially attractive – lay under the Irish Sea.

These discoveries prompted the biggest and most technologically intensive exploitation race in over a century, from which the UK became, and remains, self-sufficient in petroleum. As regards natural gas, the UK sector of the North Sea satisfies around half of demand, with the rest coming from the Norwegian sector. (Despite the climate emergency, the UK government continues to grant development and production licences and subsidies for fields west of Shetland).

Meanwhile, the American government was losing the war in Vietnam and faced huge civil unrest, a major dollar devaluation crisis and a faltering economy. To this in 1973 was added an oil crisis, after OPEC embargoed oil exports to the US due to its support for Israel during the Yom Kippur war. The US imported 30% of its oil from the Middle East, and oil supply problems led petroleum price crisis with queues at gas stations and prices rising by 30%.

The deal that was done to resolve the crisis meant that oil would henceforth be priced and paid for in US dollars – ‘petrodollars’. Saudi Arabia, OPEC’s biggest producer, then bought US government debt with its billions of dollars – in effect, lending money to the American government – and in return received military aid and equipment. Oil, gas and imperialism remained enmeshed – and of course those connections were a key factor in the 2003 Iraq War, where America needed to show it could act as ‘world policeman’ in a region with huge reserves of that key resource.

Recent instability

After the war in Iraq, America reduced its oil imports from 60 percent of its crude oil consumption in 2005 to 35 percent in 2013. Crucial to this was increased production from fracking, supported by tax incentives, which pulled energy prices down – to the detriment of OPEC. In response, in 2014 OPEC reduced output in order to drive up prices in a successful attempt to break ‘cheap’ US fracking companies – in the process also breaking many fracking investment banks, which were left with stranded assets (as Jonny Jones and I described in 2017).

Eventually, the energy markets settled down. However, the outbreak of the Covid-19 pandemic saw global industrial activity crash – and with it, fuel prices. At one point in March 2020, traded oil prices on the New York Mercantile Stock Exchange actually fell below zero, though subsidies and tax breaks from the Western home states of the oil majors kept the companies afloat, and reduced output kept prices high enough to make production worthwhile. By May, prices had recovered to a level barely above development and production costs.

In the face of these global storms OPEC took on more member states to create OPEC+ – including Russia, which had sought a 12,000 barrels per day (bpd) cut in output. In fact, OPEC decided on a 15,000 bpd cut, as well as adding Kazakhstan, Azerbaijan, Mexico and Oman to their cartel. The enlarged OPEC+ now accounts for over 60 percent of oil reserves, with Iran and Russia holding over half of the world’s natural gas reserves. Current projections see no significant fall in global fossil fuel consumption in the foreseeable future.

However, the oil and gas market is prone to highly speculative pressures, and as such bends to a wide range of global influences. For instance, the 2008 financial crash saw billions of assets in development and production gear stranded. Demand from China, the world’s biggest oil importer, has fluctuated hugely since 2008. And from late 2019 came the Covid pandemic with its recessionary impact and downturn in the demand for primary commodities. But through all this OPEC not only maintained production discipline, but also grew in terms of membership and influence.

The UK Energy Poverty Crisis

How do these factors combine to create the present energy crisis? At the beginning of February 2022, the UK price for natural gas was £1.88 per therm. Then Russia invaded Ukraine, and by the end of February the price had shot up to £3.14. By the end of 2022, however, it had fallen to £1.38 – lower than before Russia’s invasion. Before Covid and the Russian invasion, in February 2020, the wholesale price of gas on the global market in New York was $2.13 (roughly equal to £1.63) – last month it was $2.44, so it hasn’t risen much. So with UK prices lower and international prices only slightly higher, why have our fuel costs doubled? It’s not because Britain imports a lot of gas from Russia – only 4 percent of Britain’s supply comes from there, with most imported gas coming from Norway.

One factor is changing global markets. Rising oil prices have been associated in the past with recessions – for example, oil prices doubled at the start of the Gulf War in 1990. And it is now usual for OPEC to cut back production in order to keep prices high at the slightest whiff of any economic event likely to threaten demand. And just prior to February 2022 the world was showing signs of entering a recession – but a strange kind of recession for G7 countries with double-digit inflation and with petroleum and gas imports at rising world market prices.

The UK, since the early 1990’s has imported gas and oil at US$ world traded prices – despite importing all of its petroleum requirements within UK territorial waters as well as 40% of its gas. Aggravating factors that lock the UK into short-term high-cost purchases are, firstly, the gas monopoly in the form of Centrica, the partly French state-owned sole supplier which owns British Gas. Secondly, the government decided to scrap the UK’s only large scale gas facility – so that Britain has only five days of supply storage, compared with 90 days for Germany and 117 days for Italy.

Well before the energy crisis, British households already had some of the highest energy bills in Europe. Around one in five households were in fuel poverty, defined as spending over a tenth of their income on fuel – now the figure is over half, with almost 40 million people living in households spending more than 10% of their net income on fuel. Four out of five of the adult population cite energy costs as their main reason to fear debt and poverty.

In the budget earlier this month, Chancellor Jeremy Hunt kept the energy price cap at £2,500, but this will still mean a significant rise in fuel bills, as in the last year most households received £150 off their Council tax and £400 off their fuel bills – support will now be limited to the lowest income households. So fuel prices will continue to rise this spring, and food price rises are breaking records, topping 17 percent in February.

But it’s not bad news for everyone. In September 2022 the Chief Executive of Exxon/Mobil, asked about if they were worried by the thought of paying taxes, said, ‘Hell no. We have more money than God!’ Exxon/Mobil’s latest balance sheet showed a $56 billion profit. And financial reports in February 2023 showed Shell raking in profits of £32 billion and BP at £23 billion with Centrica’s British Gas operations raking in £1.34 billion.

What we see beyond the energy companies’ balance sheets are not just profits beyond the dreams of avarice. We see a balance sheet of social debt and misery, a global class war at an unimaginable scale and an unplanned and irrational system beyond human control.