Untitled Document

BY NOW everyone in the United States knows that world oil prices are going through the roof. Gas in the U.S. is now over $4 a gallon and the Associated Press reports that there has been a surge of motorists running out of fuel because they could not afford to fill their tanks. Airlines are cutting back on flights and some are beginning to charge extra for checked baggage. In other parts of the world, rising fuel prices have led to massive protests, including nationwide strikes by fishermen in Spain and Portugal, blockades of oil terminals by French farmers, and demonstrations by truckers in Britain and Bulgaria. But what is driving oil prices to record highs?

A fierce debate has broken out among financial analysts, economists and others around this question. The U.S. Senate even held hearings on the issue in May and June. Some, including billionaire hedge fund manager George Soros, argue that soaring prices are the result of a speculative bubble fueled by a surge in investment in commodity markets following the collapse of the earlier stock market and housing bubbles. Others, such as Princeton economist and New York Times columnist Paul Krugman, claim that there is no bubble, and that the price of oil reflects rising demand from China and India, stagnant production as reserves of accessible oil become less plentiful, and the falling value of the dollar caused by fundamental weaknesses in the U.S. economy.

Krugman argues that “speculation can have a persistent effect on oil prices [only] if it leads to physical hoarding—an increase in private inventories of black gunk,” but he claims that over the past five years “inventories have remained at more or less normal levels” and there has been no sign of stockpiling. According to Krugman, the claim that speculation is the problem is paradoxically coming most loudly from conservatives unwilling to accept that the era of cheap oil is over and that energy conservation needs to become a priority.

But it is not just wishful thinking right-wingers who are arguing that oil prices have been significantly affected by speculation, and there is some compelling evidence for the speculation argument. For one thing, despite a worldwide economic slowdown, oil prices have doubled in the past year alone. Over the past five years, investment in commodity index funds (similar to mutual funds, except that they are based on futures contracts—bets on the future prices of commodities—instead of stocks) has swelled from $13 billion to $260 billion. To hedge against inflation as stock and bond markets begin to look increasingly risky, pension funds, university endowments, investment banks, hedge funds, and other institutional investors have poured money into the funds, which can be traded without limit due to a regulatory loophole. (As business journalist Rachel Beck points out, however, “The money put into commodities is boosting the inflation investors have been trying to offset.”)

So is it supply and demand or speculation that has pushed up the price of oil? The answer is probably both. At the beginning of the present century, the cost of oil was hovering around $20 per barrel. By early June of this year it had reached $138 per barrel. Some analysts are forecasting that it may soon reach $200 per barrel. Much of the run-up over the past six months is almost certainly due to speculation, since there seems to be little else to explain it. But the longer-term trend is being driven by increased world demand and stagnant supply. This means that while oil prices may drop at some point in the future, they will not return to the levels they were at only a few years ago.

WHATEVER HAPPENS to its price in the short term, it is becoming clear that the era of cheap oil is over. Oil discoveries peaked in the mid-1960s, when about 55 billion barrels of new reserves were being located each year. By 2004–05, discoveries had fallen to 12 billion barrels a year, and the amount of oil extracted each year overtook new discoveries as long ago as 1980. World oil production per capita peaked at about the same time due to population growth, and has been declining ever since.

Writing in the Newsletter of the Association for the Study of Peak Oil and Gas earlier this year, Colin Campbell estimated that world production of all liquid fuels will peak in about two years, and that by 2050 world oil production will decline by about two-thirds. Production of natural gas and coal is also likely to peak within the next few decades and then start to fall. Even the usually optimistic International Energy Agency, which previously predicted that oil production would increase from 87 million barrels per day to 116 million barrels by 2030, recently downgraded its estimate to less than 100 million barrels.

The Marxist economist Minqi Li argues that the depletion of these nonrenewable resources is a consequence of capitalism’s relentless drive to accumulate, and that “If world oil production and the production of other fossil fuels reach their peak and start to decline in the coming years, then the global capitalist economy will face an unprecedented crisis that it will find difficult to overcome.” Going further, Li claims that “the earth’s ecological system is now on the verge of collapse” and “The survival of human civilization is at stake.”

Mainstream politicians and commentators would no doubt dismiss these claims as alarmist, but as the political scientist Michael Klare demonstrates at length in his recently published book Rising Powers, Shrinking Planet, the world’s major powers are engaging in a bitter struggle to grab control of fossil fuel and mineral reserves around the world, indicating that they are well aware of the problem posed by declining supplies. Increasingly, this competition is moving in a military direction.

Last October, for example, the U.S. Navy, Marines, and Coast Guard issued “A Cooperative Strategy for 21st Century Seapower,” a blueprint for American domination of the oceans and sea lanes. According to this document:

The sea-lanes and supporting shore infrastructure are the lifelines of the modern global economy. Heightened popular expectations and increased competition for resources, coupled with scarcity, may encourage nations to exert wider claims of sovereignty over greater expanses of ocean, waterways and natural resources—potentially resulting in conflict.

To ensure that the U.S. wins such conflicts, the Pentagon is currently spending tens of billions of dollars on a new generation of combat vessels, including nuclear-powered aircraft carriers, stealth destroyers, submarines, and ships designed for coastal warfare. The Navy is also redeploying more of its existing vessels to areas such as the Persian Gulf and the west coast of Africa, close to major oil producers such as Nigeria, Equatorial Guinea, and Angola. Interest in African oil production, and a desire to combat China’s growing influence on the continent, is also a key reason behind the Pentagon’s plans to set up Africa Command (Africom), an overseas joint command modeled on Central Command (Centcom), established to protect Persian Gulf oil in the 1980s.

China is seen by the U.S. as a particular threat. In its latest annual report on Beijing’s military power, for example, the Defense Department notes that the Chinese government is “developing capabilities” that could be used in a “conflict over resources,” and warns that China is strengthening its ability for “power projection” in regions with important raw material resources, including oil and natural gas. Russia’s increasing control of Eurasian oil and gas resources is also sounding alarm bells in Washington. As Klare notes, the U.S., Russia, and China are engaged in a “struggle to control the flow of oil and natural gas from the Caspian Sea basin to markets in Europe and Asia. And this struggle, in turn, is but part of a global struggle over energy,” which carries with it a significant risk of military confrontation at some point in the future.

As an alternative to the reckless military competition over energy resources in which the U.S. and its major rivals are engaged, Klare advocates “diminished reliance on petroleum as a main source of our fuel, the rapid development of energy alternatives, a reduced U.S. military profile abroad and cooperation with China in the development of innovative energy options.” All these, of course, are fine proposals. But it is hard to see how serious steps can be taken to achieve any of them without radically restructuring the entire economic system in the United States, and indeed the world.

Consider, for instance, just the first of Klare’s goals—“diminished reliance on petroleum as a main source of our fuel.” As Paul Krugman points out in another recent column, the two most obvious ways to do this in the U.S. are “own fuel-efficient cars and don’t drive them too much.” As gas prices continue to rise, a shift to vehicles with better mileage is almost inevitable, but by itself it won’t be enough unless Americans also use them much less. As Krugman notes, this will be much harder to achieve, because “it will mean changing how and where many of us live.”

There are about fifty urban areas in the U.S. with populations over one million, and most of them are sprawling metropolises with utterly inadequate public transit systems. To reduce the amount that people have to drive would involve both changing the geography of these cities so that affordable and desirable housing is not only available in distant subdivisions, and investing massively in quality mass transit. But neither of these goals can be achieved without significant central planning and direction of resources—and neither could be achieved satisfactorily without significant democratic control of the planning processes themselves.

Krugman notes one of the difficulties: “Public transit, in particular, faces a chicken-and-egg problem: it’s hard to justify transit systems unless there’s a sufficient population density, yet it’s hard to persuade people to live in denser neighborhoods unless they come with the advantage of transit access.” The only solution is to break with the imperatives of the market and set the systems up while demand for them remains low. The scale of investment that this would require can be gauged from the fact that less than 5 percent of Americans currently use mass transit to get to work.

Even more challenging will be physically restructuring cities like Los Angeles, Houston, and Atlanta so that people can live closer to work and essential amenities. To make any kind of beginning on such a project would require wresting control of large quantities of economic resources from corporate control and radically democratizing the entire political process. At the very least this would require the emergence of social movements on a scale that has not been seen in the U.S. since the 1930s, capable of forcing capital to concede significant concessions. But to push the process through to completion would require breaking entirely with the logic of the profit system. The end of cheap oil thus makes clear the necessity of replacing capitalism with a democratic and environmentally sustainable socialist alternative.