Back to the Future – It’s Stagflation again!

Although the newsreaders dare not speak its name (unusual for them – probably too busy fermenting real or imaginary divisions in the new coalition Government) it looks as if a spectre of the 1970’s Oil Price Spike has returned – Stagflation. Despite inflation hovering around 1% for a while it jumped to 3.7% in April. The two main culprits? Fuel (25% increase) and fruit (10% increase). No doubt the volcano in Iceland stopped a lot of flights bringing in non-seasonal fruit from some corner of the planet. Oh dear. Somehow “I told you so” has a hollow echo. Maybe that is the beauty of Transition. Sooner or later you will be undeniably right.

Oddly enough nobody seems to be asking the obvious question: why is fuel costing so much right now? The simplistic answer is ‘peak oil’ – which is correct – but in a sophisticated kind of way. Demand for oil has dropped below production capacity so the floor should have dropped out of the market. Indeed this briefly happened in 2008. However our friends in OPEC turned the taps off to bolster price. There is an irony in this. The costs of production for the Saudis is next-to-nothing. However the price has been set at the level to make long term investments in dirty-oil (tar sands) worthwhile. Why would OPEC deliberately reinforce the price so as to help competitors? Altruism?

In the 1970’s the Saudi’s turned off the taps for political reasons and the era of high-price oil began, if only then to falter during the 1980’s when OPEC couldn’t get its act together. It wasn’t until the first Gulf war that OPEC got properly back in control. Of course OPEC isn’t just Saudi. Venezuela is in OPEC and they also have tar sands. The other simple reason is that the Saudi’s can make good money at a time when their own economy is failing. Certainly the US involvement in Iraq is costly so the sooner the occupation can be paid for through Iraqi oil revenues the better. However, regardless, the need to prop up the oil price at the level of $80/barrel comes down to peak oil. The industry needs to make a lot of money if it is to exploit hard-to-get oil (tar sands and deep water). Price stability is key. The International Energy Agency (and mostly everyone else) predicts a roller-coaster ride over the next few years. It takes a good five years to bring oil into production.

The industry nightmare remains that periods of price depression will lead to lack of investment that will choke-off economic growth. This would lead to a very long period of economic depression where gluts of oil are followed by shortages. High price followed by low. This will ruin every economy on the planet. The markets demand stability. It needs price-fixing. High prices, stable forever. Rising prices, always rising. The age of cheap oil is certainly over – but we knew that. After this Oil supply plateau is over (around 2020 if we are lucky) then no new finds can make up for oil well depletion. Demand will rise, supplies will fall. It is reckoned that $150/barrel is the trigger point for economic depression. We were there in 2008. We will be back there within ten years if not sooner. So we may well give ourselves a period of stability (by fixing the oil markets) but then what?

Most European economies (plus Japan) can tolerate high oil prices economically because of a high tax regime. The US, on the other hand (largely for cultural reasons), has always spurned high fuel taxes. Right-wing economists always maintained that the success of the American economy was down to cheap oil and that the Europeans had made a big mistake in over-pricing the life-blood of the modern economy. The missing factor, of course, is long term resilience. The UK is in a far better position than the US. Europe and Japan will be ascendant in the high-oil-price world. But this will be a short-term resilience. Once supplies start dropping off it will take more than simplistic resilience. It will take much deeper change. The thought of us simply going out and conquering other people for their oil is repugnant to most of us.

So three things must happen. We’ll switch to gas. We’ll derive liquids from coal. We’ll undergo a cultural change. Guess which two Governments and Economists will assume to be the solution? Yup, the first two. These are called substitution options. They will be expensive, very expensive. So, no change there then. Extreme expense will enforce the third and far more unpalatable change – one of cultural shift. Our expectations will evolve. Stop expecting endless economic growth and globalisation. Think less about fossil fuels and more about renewables and sustainable food systems. These are for more difficult to implement than the quicker technological fixes we are promised.

Maybe these high prices will wash out in the short term. The Treasury has already warned the Bank of England against knee-jerk interest rate rises on the basis that there is an emergency budget coming up where the new Chancellor will suck £6billion out of the economy. That will be a little deflationary no doubt. Until then it is back to the future. Dig out your disco trousers and Spangles. Stagflation is back. Rising commodity prices will return. Economic growth will be challenged. Certainties will be uncertain. Let’s get used to it. Time to change the operating system?

About post-carbon-man

A passionate advocate of a peaceful transition to a sustainable political-economy, Mark hails from a working class farming background. Today he is a Company Director and Chairman of the Low Carbon Chilterns Co-operative. Whilst at University (Engineering Masters) he was active in Conservative Student politics but has had no affiliation since. He has travelled widely on business covering the USA, Europe, Middle East and Central Asian Republics. In 2007 Mark founded Post-Carbon-Living and a year later co-founded Transition Town High Wycombe. He lives with is wife & daughter in a home they retrofitted to be carbon-neutral. Today he blogs about surviving politics on a shrinking planet and is passionate in his rejection of Nationalism.

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