Now, the queue is back, and this time the commodity is gas. In some regions, fuel for ambulances is running out; elsewhere the garbage trucks have stopped running; and, across the grain belt, farmers are heading into harvest without enough diesel for their combine harvesters. Russia now being a land of capitalism, a small-service economy has sprung up around the queues, with professional paid place-holders and crowdsourced maps showing which stations still have fuel. Yandex searches for “how to siphon fuel” are up more than tenfold. In one viral video, a man slowly pours gasoline into his lawnmower from a jerry can and deadpans: “What riches. Who can afford this now?”

Everyone knows the immediate cause: Ukrainian drones have spent months methodically pummeling Russian refineries.  The 10 largest have been hit this year, the latest attack coming only this week. Perhaps 40% of the country’s refining capacity is offline.

So the debate is not about the causes of the shortage but its consequences. What does this mean for the Russian regime? The optimistic reading is that this is the worst energy crisis of Vladimir Putin’s reign — and thus the beginning of the end. More cautious commentators point out that Russia has had similar gas shortages before, and that the whole thing remains, in macroeconomic terms, manageable.

Still, more revealing than the shortage itself is how the Kremlin has chosen to respond. Russian fuel prices are kept down by an elaborate subsidy apparatus, which pays refineries to sell domestically below market value. This costs the government a lot: two-and-half-trillion rubles last year (approximately £23 billion), roughly half the federal deficit.

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When you keep gasoline artificially cheap in the middle of a fuel shortage, obviously you will get huge lines at the pump. So why not loosen the prices, let them float upwards a bit to dampen demand?

The answer, until recently, is that while fuel shortages can be blamed on Ukrainian drones, higher gas prices will only be blamed on the regime itself. The Kremlin had faced a choice between higher prices or long lines — and has chosen the latter. Prices have generally crept up, but by less than cumulative inflation.

But that’s no longer a feasible choice. You learn a regime’s real priorities by what it clings to when it can no longer afford to — and the government held the price cap well past the point where it made sense. But over recent months, the strategy has begun to come apart: Russian retail petrol prices have jumped 20% in a year. In Crimean Sevastopol at the start of July, prices rose 30% in a week. Wholesale gasoline in European Russia is selling for roughly 1.5 times the official retail price.

So the regime did not, in the end, get long lines instead of higher prices. It got both. This was likely unavoidable, since past a certain point no subsidy conjures back a missing chunk of your fuel. But it highlights the difficult spot the regime has found itself in, with rising prices on top of the queue.

Neither higher prices nor long lines are popular. But of the two, the long line is the one that should keep Putin up at night, because of its dreaded public aesthetics. The Kremlin has spent years constructing a war that’s real but distant. Moscow life has proceeded as normal, and nearly all information about the war arrives pre-filtered. But this carefully managed veneer cracks a little more with every intrusion of the war into everyday life, whether it’s a refinery burning in Moscow’s outskirts or a long line of frustrated drivers on its roads.

Unpopular autocratic regimes survive by preference falsification; private doubts stay that way because every skeptic has to assume they’re alone, so they keep quiet. But the gas line is the opposite: a very public assembly of everyone privately doubting their government’s capacity to provide basic necessities. When RFE/RL reports that the shortage is “the only thing they’re talking about”, that should worry the Kremlin more than any capacity statistic, and surely explains why a ban on fuel exports has now been extended into 2027.

In a poll conducted this spring, even before the worst of the shortage, 60% of Russians said economic conditions were worsening. That’s a 20-year record. Trust in the military, in the government, and in election integrity all saw the largest annual declines ever recorded. The fuel crisis has arrived in a country already more anxious than at any point since the three-day “special military operation” began.

The US had its own fuel shocks in the Seventies, and it saw similar line-ups of frustrated drivers. Those too were a policy choice: President Nixon’s price caps turned the embargo shock into a shortage, following the same electoral logic. But an American waiting for gas in 1974 was suffering something new. A Russian in 2026 is watching a rerun of the bad old days, with all the visual markers of shortages and hoarding that Putin promised would never return. This was the deal he offered to Russians exhausted by the Yeltsin years: “stay out of politics, and I will keep the shelves stocked and your savings intact”. But the promise of predictability in exchange for a free hand, already damaged by the invasion, is now dissolving.

Even beyond the Soviet Union, Russia has been here before, with local gasoline crises made worse by peak summer driving seasons. Each faded by autumn. But this is different. The drones are getting through because Russia’s air defenses are being hollowed out by a methodical Ukrainian campaign against the radars and interceptors that once protected Russian refineries. The numbers are hard to confirm from the outside, but a careful look suggests Russia has been using up its interceptors faster than it can replace them, partly because it’s repurposing them into offensive missiles aimed at Ukrainian cities.

The American oil shocks of the Seventies had political consequences, sinking Jimmy Carter and helping give Ronald Reagan his victory in 1980. That queue’s political frustration had somewhere to go. But in Russia, Putin has spent a quarter of a century welding the release valves shut. That’s why the regime appears so worried about the September Duma elections. Senior officials floated postponing the elections due to the drone campaign, and one Duma deputy has warned that the fuel crisis will cost the ruling party seats.

“No remote e-voting or three days voting periods will save certain people,” she concluded gloomily. Despite all the carefully stage-managed results, there is only so much you can do to cover up spreading public dissatisfaction. You can falsify a ballot. But you cannot falsify the queue.

To answer that question, try traveling to the AT&T Stadium. Not far from downtown Dallas, it’s hosting nine games at this summer’s World Cup. Yet despite being criss-crossed by highways, the stadium is almost comically hard to reach by public transport. Yes, there are shuttle buses for bewildered European supporters. But the whole trip, including an awkward train transfer, takes some 90 minutes, compared to just 20 by private car. From Kansas City to Miami, other host stadiums are similarly tricky to reach, even as 45% of Americans lack any access to public transport whatsoever. 

The point, here, is that the US is utterly dependent on cars and trucks to function. Roughly speaking, the average American consumes 22 barrels of oil per year. The average Brit uses less than half that; the average Italian about a third. For all the talk of infrastructure and energy independence, trains and passenger rail remain the houseplant that Washington forgets to water — decade after decade, now going on nearly a century.

Even in a famously embattled industry, it’s been a uniquely difficult year for American rail. In February, Amtrak canceled service between New York and Boston due to intense blizzards, giving intra-state passengers no sense of when service would return. That’s echoed by a more general malaise. Even living in the Acela Boston-DC corridor — where train services are far more extensive than anywhere else in the country — passengers will often be maddeningly frustrated. NJ Transit trains into New York are so frequently canceled for “overhead wire” failures that passengers must now warn their colleagues and employers that, on any given day, thanks to the country’s third-world infrastructure, they might simply not make it into the city.

A great many on the online Right prefer to blame the dysfunction of American rail on Amtrak and the rail industry itself. But, in most cases, that’s unfair. Unlike American secondary education — where high spending coexists with mediocre outcomes — US rail is generally starved of funds. The problem is not a disconnect between spending and performance; it is the simple absence of investment. In total, the federal government spends only about $30-35 per person on rail, whereas Sweden routinely spends roughly 10 times that. Even Germany, lately facing mounting criticism over the decline of its own rail network, spends roughly six times more per capita.

You can’t bake bread without flour. And given the meager funds they have to work with, Amtrak and other American rail systems punch well above their weight in both functionality and reliability. This raises the question: if rail is considered vital across much of the wealthy industrialized world — including in China, a country every bit as vast — why is it still treated as the ugly runt of America’s transit system?

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The boilerplate answer involves the country’s uniquely anti-statist brand of politics, not to mention its hyper-individualist mindset. No doubt that’s partly true. American political culture is characterized by what communitarians call “thin” social ties — with most citizens preferring privacy and autonomy to a dense communal life. It’s clear that a great many Americans would, if given the choice, still prefer to commute inside personal, metal bubbles than sit near their social inferiors on the train. But the deeper reality is that even the option of public transport is rarely available to the vast majority of Americans. Only about 15% of urban Americans boast walking-distance access to metros, commuter rails, or suburban rails, compared to about half in Western Europe and three quarters in South Korea. 

All this dysfunction is in fact the long-arc result of a deliberate — and criminal — conspiracy to destroy American passenger rail during the most critical years of the country’s urban development. In other words, the country’s toxic relationship with passenger rail did not begin organically. Nor did it emerge, as most presume, from some spontaneous cultural preference for cars and highways. Living in today’s wasteland of car parks and strip malls, it is difficult to imagine now, but during the Depression only one in 10 Americans owned a car. Of course, they still got around, just mostly on streetcars or other forms of rail.

Throughout the long 19th century, and even during much of the Second World War, streetcar systems were at their high point. Streetcars, like those still remaining in New Orleans and San Francisco, were plentiful, safe, and widely used in nearly every major American metro area. In my hometown of Salt Lake City, my great-grandfather Wilhelm Vincent Herrmann rode the streetcar each day from Utah’s capital to Ogden, a distance of over 50 miles. In a city that wasn’t even among the nation’s 30 largest, residents could travel easily on beautiful, ornate streetcars — often between cities and, in Salt Lake’s case, even up steep mountain canyons. At one point, Salt Lake had 18 different streetcar lines. All that remains today is Trolley Square, the old streetcar hub long since converted into a posh shopping mall.

As for intra-city passenger rail, what made it so different from European rail wasn’t necessarily the level of service offered — but the fact that most networks were owned privately by power companies, who founded them merely as an avenue to sell their electricity. Then, in 1936, the federal government passed the Wheeler-Rayburn Act. This well-meaning anti-monopoly bill forced power companies to sell all unrelated business holdings that didn’t actually supply electricity. The law of unintended consequences was particularly cruel here, for this singular act opened the door to a nefarious takeover of America’s passenger rail services. It was a mistake that would forever change the landscape of American life and, ironically, allow the auto companies to create a total monopoly over not only urban transit but eventually the structure of everyday American life — how people moved, where they lived, and how they worked.

When the electric companies were forced to sell off the streetcar-system operations, General Motors president Alfred P. Sloan saw blood in the water. In 1936, a powerful alliance of American auto manufacturers, tire makers and oil interests, all led by Sloan, operated a coordinated campaign to buy up nearly all the country’s intercity passenger rails — then rip them out of the ground.

To hide his direct involvement in the plan, Sloan first created a holding company: the notorious National City Lines (NCL). He then recruited a former Minnesota bus driver called Roy Fitzgerald to head the organization. Fitzgerald would operate as the frontman while GM’s president and his other investors — from Standard Oil to Firestone Tires — directed the operation from the shadows. In this effort, Fitzgerald was the perfect stooge: posing as a plucky small-town entrepreneur, he claimed he was just looking for opportunity, something he found in the nation’s financially struggling streetcar systems, which he purchased simply to “streamline.”

Like villains from a Depression-era film noir, Fitzgerald and his crew of corporate goons would show up at city councils and commissioners’ offices wearing two-tone spats and Panama hats. Then these ersatz entrepreneurs would pressure — and likely bribe — local officials into allowing them to purchase their city’s streetcar systems. They often claimed that they wouldn’t destroy these systems, but merely create a more “modern” arrangement that also included buses. It didn’t turn out that way.

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In nearly every case, within months of acquiring ownership, this phony consortium dramatically cut the rail mileage offered; raised fares; and started doing everything possible to turn the public against public-transit systems. In Los Angeles, after the NCL bought up the city’s once-extensive rail system, streetcars went from appearing every five minutes to every 10, then 12, and then, after a while, every 30. From there, they used the predictable slump in ridership to declare the whole system untenable. Over a 12-year period, between 1938 and 1950, National City Lines and its subsidiaries gained control of train systems in St Louis, Baltimore, Salt Lake City, Oakland, Los Angeles, and 20 other US cities. In most cases, they canceled the majority of services, and paved over or ripped up the streetcar tracks within a year.

Eventually, federal prosecutors took GM and the executives to court. In 1949, seven defendants were found guilty of “conspiracy to monopolize interstate commerce” — but all avoided jail. The judge deemed their crime no more serious than a “traffic violation”, fining them the ludicrous sum of one dollar each. General Motors and the other corporations involved were fined the maximum amount of $5,000 (roughly $60,000 in today’s money). That’s quite the deal for permanently eliminating your primary transit competitor and forcing an entire nation into a car-centric mode of life.

Had the auto industry’s campaign failed — and there were several whistleblowers trying to sound the alarm — the country’s landscape, economy and, yes, even foreign policy would likely look completely different. Just as no one voted for the war with Iran, Americans didn’t vote for the car-centric hellscape they now inhabit.

The downstream consequences of this change have been vast. For one thing, they’ve helped produce a sedentary population unable to tolerate walking even short distances, a key reason why 74% of US adults are overweight or obese. Combined with mass smartphone addiction, which keeps people in conceptual bubbles as they move mostly in their cars between work and home — an experience devoid of “third places” — this landscape of psychic isolation has greatly deepened social anomie and political division.

Roughly two-thirds of Americans now believe members of the opposing political party are completely immoral, with studies showing that the longer a person’s car commute, the greater their likelihood of serious anxiety and depression problems. Much of today’s cascading social dysfunction is downstream from the fact that we rarely do anything anymore except drive — in private — and interact for long stretches only with people we deliberately choose. How can a culture respect public goods when public space itself is rarely experienced?

The landscapes we build ultimately build us in return. And just as US cities were not always the asphalt and strip-mall monstrosities they are today, America wasn’t always a body politic that greeted its government’s wars of choice with a shrug. Indeed, both these points are connected: the physical structure of a nation shapes the political imagination of its people. When a society is built around highways, oil dependence, and endless suburban sprawl, it begins to unsurprisingly think and behave like a codependent society that can’t imagine life without those things. Cheap gasoline becomes a constant strategic necessity. Foreign oil fields become matters of American national security. And preemptive wars fought in the name of abstract notions of “freedom” begin to look less like aberrations and more like the logical extension of an atomistic infrastructure that operates with no concern for the public.

Such violent mood swings have become a recurring feature of this strange war, reflecting Donald Trump’s whimsical decision-making. But one consistent theme has been that the US President would like to keep the war as brief as possible and has been frustrated by his inability to force it to a rapid conclusion. 

The Iranian regime, which has been prepared to absorb a lot of punishment, has used Trump’s impatience to its advantage, and still appears to believe that time is on its side. Nonetheless, it too is showing signs of exhaustion, with its negotiation team reportedly staying back to craft a fresh proposal after the Americans left. The resulting willingness of both sides to carry on talking has thus brought a wave of relief to investors. 

Still, we should hold our breath and hope for good news. There’s already a lot of damage baked into the economy — damage that will become more apparent, and more painful, as the year progresses. Everything now hinges on these peace talks succeeding. If they fail, things could turn south quickly.

So far, the economic harm of the war has been fanning out across the world gradually, at the lumbering pace of an oil tanker moving across the world’s oceans. It showed up first within the Gulf region, then in nearby Asia and Africa. It turned up in Europe last week, and this week began to reach the United States, with the last tankers to have left the Strait of Hormuz before the war broke out now arriving at their destinations. As a result, if the Strait is not reopened soon, refineries across the world will soon have to start cutting production. Should we reach that point, even the supposedly most sheltered economies, like the United States, will start experiencing shortages.

Given how badly the global economy was affected by oil shocks in the 20th century, it’s fortunate that panic-buying, long queues and energy rationing haven’t shown up in more places, being confined so far largely to Asia. After all, given that something like a sixth of global oil production has been taken offline, along with crucial exports of fertilizers and helium, the head of the International Energy Agency declared the resulting shock to the world economy worse than any previous energy crisis, including those of the Seventies. 

But what has softened the blow so far has been a buffer of oil accumulated by many countries prior to the war. Some countries, such as China and Japan, had long-standing strategic reserves. They and others have also benefited from the fact that it takes weeks for cargoes to reach them — again ensuring that shortages have taken a while to kick in. J.P. Morgan estimates that refineries have been able to run through those stocks until now, minimizing the impact of the sudden shortage. But the Bank expects that, over the coming days, those buffers will run out. While $4-a-gallon gasoline may seem excessive to Americans, it may only be the start.

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All this is contrary to the simplistic narrative that was circulating after the war broke out. The war’s victims, the narrative went, would be those countries which depended most on Gulf oil. China, by this telling, would suffer, whereas the US, since it was a net exporter of petroleum products, would come out a winner. But this isn’t how the war is doing its harm. What matters is not the scale of the shock to hit the economy, but its ability to absorb it. 

So, while China imports a lot of Iranian oil, it also accumulated large buffer stocks before the war and has been decarbonizing its economy for years, giving itself considerable resilience. The country was thus able to absorb a temporary hit. Nevertheless, it now appears to have burned through its fat. The strains are beginning to show, with rising costs and supply shortages starting to affect the manufacturing powerhouse. Moreover, the impact on global demand is hitting Chinese exporters, which in March recorded a sharp drop from earlier in the year.

Although further removed from the conflict, many Western economies had less of a cushion to absorb the inflationary shock. The dependence of many European countries on natural gas supplies from the Gulf was rapidly exposed. Britain, which was already struggling with relatively high inflation and interest rates, has taken a particularly big hit, since consumers already struggling with rising expenses now face the added burdens of pricier petrol and steeper electricity and heating bills. And as for the US, its relative distance from the conflict, the stimulus of tax cuts and its status as a net exporter of petroleum products have given it some resilience. 

Nevertheless, it matters little that the US can gain a windfall off new oil sales, because the oil and gas sector accounts for a measly 1% of the country’s economy. Everyone else, not least the beleaguered manufacturing sector that Trump promised to revive, is facing higher prices, which are helping to both drive up interest rates and empty out wallets. Not only did the recent reports on Consumer and Producer Prices reveal US inflation shooting up on the back of rising energy costs, but inflation had already been rising in recent months, and not just due to energy prices. In short, this inflation problem probably won’t be transitory.

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Price increases are manageable when outstripped by wage growth, but this is not happening in Western economies. Until now, American wages have stayed afloat on the back of lavish government spending, but it seems unlikely that a prolonged decline in real wages will not eat into consumption. Ordinary Americans hardly care that other countries have it even worse than theirs. They elected Trump to restore good jobs and bring down prices, but instead, prices are soaring, job growth is all but stagnant and real wages, which have declined since he took office, have now turned negative. That is, expenses are rising faster than paychecks can hope to meet them.

This helps to explain the recent collapse in consumer confidence, which last week was reported to have reached the lowest point ever recorded, with consumers expecting their finances to worsen and prices to rise over the next year, which will likely make their spending behavior more cautious. As of now, the only thing propping up the US economy appears to be rich consumers whose incomes have been swollen by tax cuts and the wealth effect of a buoyant stock market. 

As far as that goes, the Trump administration has so far managed the messaging to investors fairly effectively, repeatedly sending signals that peace is around the corner and thereby minimizing anxiety. This has helped to keep the market steady, which is for Trump the acid-test of his presidency and indeed of his conduct of this war, but at a possible cost: it buys more time for the administration to negotiate, in the hopes of securing the sort of surrender the Iranians are currently unwilling to contemplate; but it also prolongs the standoff. The markets haven’t collapsed, but nor has the Strait reopened, not least since the US is now enforcing a blockade of its own.

In the meantime, cracks in the wall of complacency are emerging. Goldman Sachs estimates that the rising cost of inflation will wipe out the stimulus from the tax cuts. That leaves the stock market to do the heavy lifting of keeping rich Americans spending. Expectations of a strong US earnings season, which just got under way, may well produce a rally in the next couple of weeks. But as the year progresses and the baked-in impacts of the war hinder the economy, the market could subsequently settle into a funk. In the best case, if the war ends very soon and normal business resumes, pent-up demand and damaged supply-chains could keep inflation higher than before, hurting the earnings of consumer-facing firms. In the worst case, if the war goes on for months, inflation and interest rates could rise sharply, potentially triggering a market meltdown and perhaps a recession. As it stands, Polymarket puts the chance of an American recession by the end of 2026 at around 30%. A prolonged war would raise those odds, and a market meltdown would probably push them over 50%. And in the event of a downturn, rising debt levels would make it hard for governments to commit to counter-cyclical fiscal policies without driving up interest rates and thereby choking off investment, while rising inflation would make it hard for central banks to cut interest rates.

Put it all together and we have a fragile European economy, a Chinese one whose export-engine may slow down amid weakening sales, and an American economy headed into possible difficulties. With the world economy looking decidedly fragile, it’s no surprise the IMF this week warned a re-escalation of hostilities could knock its growth down to the lowest levels since the pandemic.

Right now, optimism that an end to the showdown is nigh has kept oil prices from spinning out of control. Nevertheless, the gap between the futures market, where oil is trading at under $100 a barrel, and the physical market, where a barrel of oil now fetches $150, is growing huge. The first price reflects the hope the war will end soon, the second the reality that it hasn’t and the global shortage is worsening. 

That divergence can’t continue forever. If the peace talks fail and hostilities resume, the future price will move upward. If they succeed and the Strait reopens, the spot price will fall and everyone will be able to start rebuilding. All eyes will therefore be on Islamabad this week, to see if the peace talks resume and yield progress. If they do, we can resume breathing. But if talks fail and hostilities resume, we can head for the proverbial bunkers.

As the war enters its second month, we find ourselves at a moment of maximum uncertainty. The Strait of Hormuz is besieged by missile launchers. The oil price has surged. America’s Nato allies are balking at Trump’s demands for help. Trump has announced a five-day postponement of strikes on Iranian power plants, claiming that Iran and the US are now in peace talks — only for a senior Iranian official to deny that such talks are taking place. All the while, domestic pressure is mounting on Trump: his allies want him to finish the job or get out.

Will Trump double down to achieve a complete and unquestionable victory, perhaps through a territorial takeover of the Strait of Hormuz? Or will he claim the action he’s already taken as a total win, blame his allies for failing to secure the peace, and walk away? Will the global economy ride out the chaos — or should we expect recessions?

With these questions in mind, the Swift Centre has consulted its forecasters on what is likely to happen next.

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1. Will the US send in the army?

If President Trump wants to secure a clear victory, the most urgent question facing the Pentagon is whether aerial dominance is sufficient. If not, then does the US commit significant troops — not just special forces, but a brigade — to secure critical strategic territory? A ground war would be highly unpopular with most Americans — but it might be the only way to destroy the remnants of Iran’s nuclear program or control the critical supply chain through the Strait of Hormuz.

To analyze the prospects of a ground war, the Swift Centre professional forecasters were asked about the likelihood that the US will deploy more than 1,000 troops into Iran before May 31st 2026 — providing a median forecast of 30%.

The forecasts were made before Trump claimed that peace negotiations were underway, but they take into account the President’s volatility. Of particular significance is Trump’s statement, when asked about the prospects of a ground war, that “nothing is off the table”.  

As one forecaster observed: 

“The simple fact that the door was not closed was a meaningful turning point. Previous presidencies (including 45th) had not hesitated to rule it out even if that meant losing some strategic advantage.”

That the 11th and 31st Marine Expeditionary Units (MEUs) are en route to the region has added weight to this possibility. These units, though relatively small, are designed for the kind of targeted territorial seizures now being discussed in Washington. Forecasters are particularly focused on the crown jewel of Iran’s oil export infrastructure: Kharg Island.

“[The deployment of 1,000 troops on Iranian soil] is most likely to happen if the US tries to seize Kharg Island or secure the Strait of Hormuz… Strikingly, a thousands-strong Marine Expeditionary Unit (MEU) has been dispatched from Japan to the Middle East. It will arrive in the region well before May 31.”

Some suggest Trump has held an obsession with the island for decades, citing a 1988 interview where he claimed “One bullet shot at one of our men or ships, and I’d do a number on Kharg Island. I’d go in and take it”.

But a large commitment of American troops would entail significant risks — and the taking of territory would not necessarily bring the US closer to achieving its goals. As a more skeptical forecaster put it:

“It is very difficult to determine what military objective would be simultaneously risk tolerant for political leaders and effective in changing the political will, economic conditions, or combat conditions to warrant using them to attempt to take any territory.”

Ultimately, President Trump needs to weigh his priorities for this conflict in the context against the political risks in an election year. One forecaster put it bluntly:

“Does he have the guts to send over a thousand soldiers though?… That’s bound to bring a high number of coffins back home, and this is not going to look good six months before the midterms”.

2. For how long will the Strait of Hormuz be at a standstill?

The Strait of Hormuz, being the world’s most critical economic choke point, is being held hostage by Iran. The IRGC has calculated, correctly, that if it can hold up the shipping, it can cause worldwide economic havoc, thus creating leverage for itself.

So far, the strategy seems to have been effective. The International Energy Agency has already stated that this war is causing the largest ever disruption to oil markets and that oil flows will take months to recover after the war ends. If Trump seems more interested in peace talks, it is probably at least in part because he fears that Iran can inflict economic pain on the US and its allies.

We therefore asked our forecasters how long it would take for the Strait of Hormuz to return to a “normal” flow of traffic following a US withdrawal or indefinite cessation of military action. Our yardstick for “normal” was the point when the seven-day average of ship arrivals reaches 60 per day, as reported by IMF Portwatch.

The result was a median forecast of three weeks. On paper, a three-week lag sounds manageable. However, the distribution of our forecasts reveals a worrying long tail. The forecasters believe there is a 90% chance the Strait will be back to normal within eight weeks — but that leaves a 10% chance that the disruption could last even longer than two months. The physical and legal friction of war cannot be wished away by a presidential decree or a declaration of victory. As one forecaster noted:

“The requirements are: 1) Demining the area, 2) insurers and carriers agreeing to resume transit and ships physically getting back to the Gulf, and 3) about seven days of high enough traffic to build the moving average”.

In other words, there is no switch enabling the world to go from zero to “normal” in only a few days.

Beyond the logistics, there is a deeper risk: that the cessation of military action does not equate to a restoration of the status quo. Forecasters are weighing the possibility that the Islamic Revolutionary Guard Corps (IRGC), having survived the initial US onslaught, permanently weaponizes the Strait. One forecaster noted:

“If the IRGC survives, which is the most likely scenario… They will instead see it as an opportunity for leverage on their enemies and will act to control their access. With that in mind, I think they will set it up as a toll gate, charge ships for the privilege, and be selective as to who they let pass.”

The longer the war goes on, the greater the risk to infrastructure that would be required to get the supply chain back to normal levels. A forecaster who felt the most likely scenario was a fast reopening warned that it could take up to 12 weeks, noting the possibility of the Strait being heavily mined. The same forecaster warned that it would be in the Iranian regime’s interests to slow down the reopening.

A toll gate would be a nightmare scenario for global trade. It would place a tax on the West while favoring Iran’s allies, like China and India, whose ships have already begun to trickle through the Strait again. For Trump, this creates a secondary dilemma: walk away and allow the value of the Strait to be extracted by Iran, or stay and commit to the very type of “forever war” he has spent his political career railing against.

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3. Will the war cause a recession in the West?

The ripples of the Iran conflict are already washing against the shores of the world’s largest economic blocs. European economies, having failed to make a quick recovery from the Covid pandemic, were already struggling with the effects of the war in Ukraine, and are vulnerable to the fallout from the war in Iran — not least because the EU has failed to secure its own energy supply. A key question, then, is: will the US or the EU fall into a recession in 2026?.

The Swift Centre’s current aggregate forecast places the likelihood of such a recession at 35%. While this might not yet be a coin-flip, it represents a dramatic elevation above the historical base rate — estimated at around 10-15% for these regions. The key factor here is energy. As one forecaster noted:

“Europe didn’t need for the Strait to be closed in order to already have issues, so I’m pretty concerned”.

The forecasters note a stark gap in vulnerability between the two economic blocs. While the US can look to its own domestic petrochemical resources to smooth out price shocks, Europe remains perilously exposed to the flow of gas and oil from the Persian Gulf. 

“The EU bloc is more vulnerable than the US with growth being anemic anyway and [its] dependency on oil from the Gulf region being higher.”

In part, the economic danger is represented by the price at the pump, which is often the focus of the mainstream news. But other risks include potential shortages of critical industrial materials such as aluminum, fertilizer and helium. Swift Centre forecasters note a troubling cocktail: the war in Iran is coming at a time when the private credit market in the US is in trouble; when there are significant structural constraints on European industrial growth; and when Trump’s own tariff policies are causing inflationary pressure on the American economy.

If the “toll gate” scenario in the Strait becomes a reality, then, the temporary shock of war could transform into a structural economic drain. One forecaster cautioned that “if Hormuz strait remains functionally closed for months… the risk rises dramatically”. The EU, facing a potential multi-year natural gas shortage, will be hoping for a quick resolution, but time is running out.

Nevertheless, there is hope. Some forecasters are more bullish on the economic resilience of the EU and US. They note that consumer demand, which remains healthy, is a reliable predictor of whether the US faces recession, and that if the US stays out of recession, then the EU generally does the same. “The US has experienced gas prices this high many times,” one forecaster wrote, “and there are many tools that can be used to manage or lower gas prices.” Perhaps Trump’s hand is stronger than his claims of peace talks would suggest.

Indeed, there’s plenty of evidence that the second oil crisis is already here.

On Oct. 17, 1973, the Arab members of OPEC announced a 5% monthly production cut after Washington airlifted weapons to Israel during the Yom Kippur War. Next came a full embargo against the United States and the Netherlands(the latter boasted one of Europe’s most pro-Israel governments at the time and was used as a staging ground for US support to the Jewish state).

The price of crude surged to $11 a barrel, up from $3, in a matter of weeks. American gasoline prices jumped 40% by November. Lines formed at filling stations. The Western world was in crisis. The US economy tipped into stagflation and remained there for the rest of the decade. By the end of the 1970s, then-President Jimmy Carter gave a speech diagnosing a national “malaise” and a “crisis of confidence.” He also urged his countrymen to wear sweaters in lieu of burning fuel to warm themselves.

The embargo lasted five months. The damage lasted a decade. Japan, which imported almost all its oil, restructured its entire industrial base around electronics and fuel efficiency. That pivot made Japan’s economy more innovative, the envy of the world for the next 20 years. The crisis also created the International Energy Agency and the first serious strategic-petroleum-reserve frameworks that still exist today: after what the global economy went through that decade, countries wanted to deal with the issue collectively, coordinating in preparation of the next embargo.

But there is a crucial difference between then and now. In 1973, the disruption resulted from a political decision by producers to turn off the tap. Supply could theoretically have been restored the minute politics changed.

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Trump is trapped by the logic of war

By Wolfgang Munchau

What we confront now, as a consequence of Trump’s Iran war, is more complicated: chokepoint closure, damaged infrastructure, insurance markets in disarray, fields shutting in (temporarily closed). And the scale is simply not comparable. Around 20 million barrels a day move through the Strait of Hormuz, roughly 20% of global consumption and nearly a third of all seaborne oil trade. The 1973 embargo, damaging as it was, didn’t come close to these conditions. This is a supply disruption brought about by Iran in response to Tehran being attacked by two nuclear powers, and its ramifications won’t soon be contained, much less reversed.

The Strait of Hormuz is 21 nautical miles wide at its narrowest. That makes room for two shipping lanes, each two miles across. Around 100 vessels a day transited the strait in normal times, 60% to 70% of them tankers or liquid-natural-gas carriers. Saudi Arabia moves 38% of the crude that transits the strait, Iraq another 22%, and the United Arab Emirates 13%. The top five exporters between them account for 93% of all the crude that goes through that passage.

Saudi Arabia and the UAE have constructed pipelines for just this type of contingency. Together, they can route about 2.6 million barrels a day around the strait, approximately a third of Gulf export volumes. Iraq and Kuwait have no such option, however. And Qatar, which supplies roughly a fifth of the world’s LNG, has no alternative route to market, either. This is a structural problem that sheer capacity alone can’t overcome.

Since Feb. 28, commercial shipping through the strait has nearly ground to a halt. Tanker traffic dropped 70% in the first days and then fell to near zero as jacked-up insurance premiums rendered the economics impossible. Most of the vessels still moving are from the Iranian dark fleet. Washington has been reluctant to target them, wary of what Tehran would do to Gulf energy infrastructure in retaliation. Protection-and-indemnity war-risk coverage was suspended as of March 5. The Trump administration floated the idea of sovereign-level tanker insurance, but Treasury Secretary Scott Bessent quickly walked back the brainstorm. That would have put US taxpayers on the hook for damaged cargo, while the US Navy has made it clear that it lacks the ability to offer protective escorts in the near future.

In short, without insurance, ships don’t move.

Iraq’s three main southern oilfields have seen production collapse by 70%, falling to roughly 1.3 million barrels per day, down from 4.3 million. Onshore storage is filling because there is nowhere to send the crude. Fields that shut in don’t simply restart if and when a ceasefire is announced. Reservoir pressure, infrastructure condition, damaged terminals — all factor in, to the world economy’s detriment.

The timeline for restoration is weeks at best and months in the most realistic cases. Even today, the market is pricing a clean restart. Yet that assumption has very little basis in how the Middle East actually operates.

Brent, a key oil benchmark, is now trading north of $106 a barrel. That is the number that gets attention, but it is everything that this number triggers that needs to be examined.

Liquefied petroleum gas and naphtha (liquid hydrocarbon used in the petrochemicals industry) move through the Persian Gulf in enormous volumes, and almost nobody outside the energy sector thinks about them. Naphtha is what petrochemical plants, heavily concentrated in Northeast Asia, run on. Those plants make plastics, fertilizers, packaging, and the agricultural chemicals that go into growing the food we consume. When naphtha supply is disrupted, the effects don’t show up at the pump. They show up six to twelve weeks later in the price of a bag of flour, a bottle of cooking oil, a box of cereal.

We watched this in slow motion after Russia invaded Ukraine in 2022. Russian and Ukrainian wheat, corn, sunflower oil, and fertilizer were never formally sanctioned. But the disruption to trade finance, shipping insurance, and port logistics was enough to send food prices into a commodity super-cycle that hit Egypt, Lebanon, Pakistan, and Bangladesh harder than anywhere else. Governments already stretched by their Covid fiscal response had nothing left to absorb the extra shock. The Third Gulf War threatens a repeat — on a much wider scale.

Then there’s LNG. Qatar has declared force majeure on LNG exports, freeing itself from delivery obligations, after drone strikes hit its export infrastructure. Qatar accounts for roughly a fifth of global LNG supply. The IEA estimates a full Hormuz closure would pull more than 300 million cubic meters per day out of the global gas market, about twice what Nord Stream carried at its peak. There is no spare liquefaction capacity sitting idle somewhere that can cover that. Australia, the United States, and West Africa are all running near full capacity. Asia and Europe will end up competing for the same cargoes, bidding up prices that eventually land on ordinary consumers.

A ceasefire in the next 30 to 60 days, followed by a slow normalization of shipping, probably keeps Brent somewhere between $110 and $130 and takes at least half a point off global GDP.  That is the optimistic scenario, and it requires things to go well politically in a region where things have a habit of going, well, boom.

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By Michael Lind

Beyond 90 days, the picture darkens considerably. Shut-in fields, damaged port infrastructure, an insurance market that can’t simply switch back on, storage constraints that have permanently altered production profiles in some fields. Iran’s own military spokesperson has already warned publicly to get ready for oil at $200 a barrel. Analysts at Rystad Energy have Brent at $135 by June if the war runs for four months. Markets are not pricing that yet. They were not pricing a pandemic in February 2020, either.

The IEA, founded in the wake of the 1973 crisis, has now coordinated the largest emergency stockpile release in its 50-year history: 400 million barrels across more than 30 countries, with the United States contributing 172 million barrels from its Strategic Petroleum Reserve. It is an extraordinary intervention. It is also, as analysts at Bernstein noted, only about 15% of the daily supply lost due to the Hormuz closure. The barrels also take 60 to 90 days to meaningfully reach the market. It buys time but doesn’t fundamentally deal with the problems outlined above.

The United States isn’t insulated from these price shocks. The Trump administration has been fighting to tame inflation, and that fight gets considerably harder if oil stays above $100 a barrel for any length of time. Trumpian spokesmen gloat about domestic production, serenely unaware that oil and gas are fungible global commodities: a chokepoint several thousand miles away will drive up prices everywhere else — that is, unless Washington is prepared to contemplate an export ban.

The picture is still bleaker elsewhere. As consumers, China, India, Japan, and South Korea together account for around 75% of the crude that transits the Persian Gulf. China alone sources more than half of its 11-million-barrels-a-day import requirement from the Middle East. For those countries, this is literally the lifeblood of their economic development.

And as it was in 1973, the people who absorb the worst of it will not be the ones with the hedges and the trading desks. They will be in Cairo buying cooking oil, or in Karachi watching the price of flour move out of reach. They will be working-class Trump voters on low incomes who need to fill up their tanks to get to work. Half a century on from the first oil crisis, a narrow passage can still bring the global economy to its knees.

Since the operation to extract Nicolás Maduro from Caracas and fly him to the US to face trial, much has been said about how the American operation will shake up geopolitics and the world economy. China, which imports about half a million barrels of oil daily from Venezuela, has just lost a key strategic partner, delivering the advantage in the US-China rivalry to Washington. Meanwhile Venezuela’s vast oil reserves, which we keep being reminded are the biggest in the world, have now fallen into the grip of the US. With this control secured, America will control a vast supply of cheap energy, which it can use to enrich its oil companies, power its industrial renaissance and dictate policy to world energy markets.

But if all that were true, we’d have expected to see big movements in world markets. As traders digested the dramatic news, Chinese stocks would have plunged as the country’s growth prospects dimmed; oil prices would have either plummeted as the world anticipated the massive supply of new crude, or alternatively soared as the risk of conflict and attendant supply disruptions heightened; government bonds and the dollar would have rallied as investors flocked to the safety of US treasury paper in anticipation of wider conflict. That was, after all, what happened in past conflicts over oil: the 1973 Yom Kippur War tipped the world economy into recession, and the 1979 Iranian Revolution, by sending inflation skywards, helped bring down governments in the British and American elections in the next year.

But none of that came to pass this time round. Chinese stocks were up on Monday. Bonds barely budged. Currency markets revealed few signs of major movements to safe havens. The oil price moved sideways for most of the day. Essentially, traders were telling us there was nothing much to see here, folks.

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Trump is starting an oil war

By Michael Lind

Put simply, little has changed. The suggestion that a sudden flood of Venezuelan oil will swell global supply rests on the apparent assumption that all you need to do is sink a well a few feet down and black gold, ready to put into automobiles and diesel generators, will come gushing out. In fact, Venezuela’s oil infrastructure is so degraded by years of neglect, and its business environment so difficult to navigate due to decades of corruption and poor governance, that the scale of investment required to revive production, refinement and exports is vast — typical estimates being north of $100 billion over 15 years.

Where will all that money come from? Venezuela is broke and, in the absence of US security or financial guarantees, is unlikely to suddenly obtain access to abundant cheap credit. Even though Venezuelan bond prices shot up some 24% on Monday, that means investors will still pay a mere 41 cents on the dollar — which, when converted into a yield, leaves Venezuelan interest rates well into double digits. As for the private sector, although in the wake of the operation US President Donald Trump said US oil majors would “go in, spend billions of dollars, fix the badly broken infrastructure, the oil infrastructure, and start making money for the country”, those same companies have so far been noticeably silent on their own plans. A former executive for Chevron, the only American major that still has operations in the country, has floated the possibility of raising $2 billion for further Venezuelan investment. But the majors are, at least so far, waiting for more clarity.

With projects already underway elsewhere, it’s not clear what advantage they’d gain from suddenly re-allocating capital to Venezuela — not least because the long time-horizons involved would require a stable, predictable environment before the majors feel comfortable sinking money again. Which is to say, a regime change. And what happened on Saturday fell far short of that.

Instead, all that the weekend’s military operation accomplished was to change the leader, not the regime. And while the administration maintains that the new acting president Delcy Rodríguez, who is seen as a relative pragmatist among the Chavistas, will effectively do what the White House instructs it to do, the idea that the US can simply install a satrap and then retreat to the comfort of Pennsylvania Avenue stretches credulity.

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With hardline Chavistas still in control of the military and a network of militias throughout the country, Trump will find it difficult to shape events without putting boots on the ground. Assuming he doesn’t do that, he will likely get lip service and not much more from a leader that is likely to have a weak base of domestic support. It’s hard to imagine any Venezuelan leader who acts as a US puppet being able to retain significant backing from either rival elites or the population at large. If Trump does try to bolster her by sending in American soldiers to establish order, it will do to his presidency what happens to most presidencies that start with a major foreign invasion: mark the beginning of the end.

Americans seldom like foreign military incursions, except for those that are brief and successful, like last summer’s bombing of Iran. And as the President who was elected on a pledge to end the country’s “forever wars”, Donald Trump has little political leeway to commit resources to a major Venezuelan operation. With his Venezuelan action already polling badly, he can talk the talk but will find it very difficult to walk the walk.

Investors therefore know that little has changed, which is why their response to the operation has so far been to stand by and wait for more. Which makes one wonder, what was this all for? As a piece of theater for the home audience, the daring and stunningly effective intervention may have been a ratings hit. But if it now bogs the US down in a country which has previously given it a lot of grief, all while hurting America’s international standing, it risks turning into a Pyrrhic victory.

In fact, there’s something about this whole operation that feels strangely anachronistic. Although some see this fight as an extension of the US sphere of influence or even a battle over drugs, most of the commentary, at least in the Western media, has treated this as a resource war, a variant of the Great Game to secure control of a key resource and thereby gain a stranglehold over one’s rivals. The sort of great-power conflicts which defined much of the past two centuries.

But the world has changed. The global economy is far less resource-intensive than it once was, and its oil intensity has been in long-term decline. In the 20th century, the world economy was powered by oil and coal. Today, even though that remains the case, the world is rapidly transitioning to diversified supplies of renewable energy which depend entirely on local resources. Over time, the carbon intensity of the world energy supply will thus decline further, making oil less strategically important. That no doubt explains why China’s markets were unmoved by the weekend’s events — it had already reduced its dependence on Venezuela to the point it accounted for only about 4% of its total oil imports. The country is leading the world into the energy transition at a rapid pace, installing renewable energy and reducing its oil imports precisely to end such vulnerability to disruptions to global supply.

And while Western countries are following Trump’s lead and starting to temper some of their moves towards renewable energy, the rest of the world is instead following China’s lead. The main markets for Chinese exports of EVs and solar panels are now shifting from Europe to the developing world. What is driving their transition is not concern with climate change but the more immediate gain of reducing import dependence and foreign exchange bills.

If anything, Trump’s move on Venezuela will further incentivize developing countries to speed up their efforts to decarbonize their economies. American administrations of all stripes have demonstrated their willingness to use their control of energy and financial markets as weapons. What better way for developing countries to remove that weapon than by eliminating one’s dependence on what America — or any other country for that matter — controls? They’ll localize energy supply and look for other ways to manage their money than parking it in the US. (Perhaps not coincidentally, gold was one of the few assets whose price did move sharply higher on Monday). Ethiopia, with its abundant hydroelectric resources, recently banned the importation of internal combustion engine cars in order to reduce its fuel bill, while Ukraine is making its electrical grid more resistant to Russian bombs by shifting away from big power plants to rooftop solar. Europe, one recalls, fell into recession when the 2022 Russian invasion of Ukraine cut off its gas supply, so it knows a thing or two about strategic vulnerability.

All that helps to explain why oil has been in a long bear market and has largely shrugged off the events that would have once caused major shocks to world energy markets, from Middle East wars to Latin American invasions. Trump has devoted American resources to seizing a prize which will over time be increasingly less sought. Which is why when he brandished it before the world, investors scarcely budged.

For all the talk of a return to 19th-century style gunboat diplomacy, a lot has changed since the high age of European imperialism. As Robert Pape, a specialist in insurgency at the University of Chicago puts it, the capacity to resist imperial aggression today far surpasses then. Where Gatling guns once faced men with spears, today, potential guerrillas have access to modern lethal weaponry on an industrial scale. It takes a lot of gunboats to assert supremacy today. Trump thus faces an unpleasant choice: either cut bait now, or go all in and watch his presidency be defined by the successes, or more likely failures, of what will be seen as his war.

But what a difference a half-century makes. After Israel launched its attack on Iran last week, the oil price rose sharply, but only back to the level at which it spent most of the last three years, merely reclaiming recent lost ground. As for fears of a global recession, stocks briefly fell before regaining most of their ground too. At least initially, the world’s investors regarded this war as an irritant rather than a catastrophe.

It’s a bit surprising, not least because the war lands at a delicate time for the world economy. In the last couple of weeks, both the OECD and World Bank issued their updated economic forecasts for the world economy. Neither is optimistic: global growth is expected to stay below 3% this year. Leading the way downwards are the developed economies, all of which are growing slowly if at all.

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Trump will make China great again

By John Rapley

So, despite the serene sense in markets amid a major war, the risks to the global economy remain high. The tenuous balance of the moment may not last. For now, the world’s major powers are standing by while Israel and Iran slug it out. When US President Donald Trump suddenly left this week’s G7 Summit and tweeted that Tehran should evacuate, speculation was rife that Americans were about to join Israel’s fight. But when the night passed without further incident and Trump subsequently said he was looking for a “real end” to the war, its future course remained as unclear as ever. While Israel enjoys the upper hand, having apparently established complete air dominance, the conventional wisdom is that it does not have the ordnance or air power needed to deliver a decisive blow. To completely destroy Iran’s nuclear facilities, Israel would therefore need the Americans to join their mission. But a rift has opened in the administration between those who want to back Israel’s war, like the US ambassador Mike Huckabee, and those who want to continue the pivot towards containment of China.

This raises the possibility that Israel will be left to continue this war alone and, unable to bring it to a resolution, will succeed mainly in motivating the Iranian leadership to double down on the creation of a nuclear bomb. It’s a safe bet that if the Iranians do that, the Saudis will move to do so quickly as well. The insecurity in the region will then only worsen.

Yet accurate predictions would require knowing the President’s mind, and it’s not clear if anyone does. Although American presidents have enjoyed a great deal of discretion in foreign affairs, there has always been a general predictability to the behavior of American presidents. Trump’s predecessor Joe Biden, for instance, could be counted upon to grumble incessantly about Netanyahu but always give him what he wanted, in light of his ideological commitment to Zionism. But with Trump, it seems to come down largely to who he is listening to on any given day.

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Netanyahu’s attack on US diplomacy

By Heather Penatzer

During his second presidency he has indicated quite unambiguously that the United States is tired of playing the role of hegemon in global affairs and will thus base its future decisions on its own priorities, as expressed by the President himself. He apparently believes that nimbleness allows him the freedom to do deals and rework the rules of international economics in a way that maximizes American interests.

But if the renunciation of long-standing commitments and alliances gives the President the freedom of maneuver he apparently envies in leaders like Vladimir Putin and Xi Jinping, Trump’s approach differs in one crucial respect. Whereas Xi and Putin — and even North Korea’s Kim Jong Un for that matter — root their decisions in strategies and ideological visions that are identifiable and consistent, Trump’s America First vision remains inchoate and unclear. One day tariffs are on because they’ll restore American manufacturing, the next they’re off because they were only ever intended as bargaining chips in trade negotiations. One day mass deportations are on to protect American jobs, the next they’re off because they’re hurting American farmers and hoteliers. And on it goes.

Amid this uncertainty, long-term planning has become challenging. So far, most American business managers haven’t changed their investment plans for this year, although early signs of an increase in the number of firms aiming to scale back investment amid rising uncertainty are starting to emerge. But more tellingly, the evidence that foreigners are starting to lose faith in America, and are consequently pulling their money out, continues to accumulate.

In this light, the most significant development of this Middle East war is that a decades-old rule of the global economy — that in a geopolitical storm, everyone heads to the safe bastion of the US — appears now to be broken. In the past, amid increased tensions in the region, the oil price rose, the dollar strengthened and US bond yields fell, as global investors rushed to park their money in the safe haven of the US. This time around, the opposite has happened. The oil price has remained in its recent range, the dollar has continued sliding and bond yields haven’t fallen. In the meantime, gold continues its relentless upwards march as the world retreats from the dollar and returns to the ancient metal as a favored reserve currency.

What appears to be unfolding, therefore, is a global economy that resembles that of the period between the last century’s two world wars — a time when a declining empire, the UK, lost its hegemonic role but the rising power, the US, wasn’t ready to replace it. Britain had ceded its place as the world’s biggest economy to the US, but the Americans weren’t yet ready to build a military force to match their status as an economic superpower: on the eve of the Second World War, Douglas MacArthur lamented that the entire US army, which was smaller than Portugal’s, could have fit into Yankee stadium to watch a baseball game. Britain, meanwhile, was desperately trying to avoid conflict at all cost, and could not play the role of world policeman. Equally the pound sterling was gradually weakening, but the US dollar didn’t yet replace it as the world’s reserve currency. Amid that de-centered world economy, there followed an era of volatility — financial crises which were poorly managed, trade relations which worsened — and which climaxed in the Great Depression and the onset of war.

The world economy today may be moving into a similar interregnum. That would make it vulnerable to any kind of major economic shock, of the sort seen in the 2008 global financial crisis or again in the 2020 Covid crash. But those crises occurred at a time when there still existed a broad political consensus among G7 states about the global order, one based on open markets and relatively unhindered flows of money, goods and services. As a result, financial and political leaders were able to manage those crises swiftly and effectively with a high degree of coordination, involving such measures as central bank swap lines, and a widely shared consensus on the basic contours of policy: a blend of loose fiscal and monetary policies and a commitment to keeping global trade flowing.

Faced with a similar economic shock today, it’s possible such harmony will prove elusive. And while the Middle East war may not provide the shock, other tensions are building in the global financial system. Some see private equity headed for a moment of crisis, while the formal financial system’s recent embrace of crypto, despite still not being able to make a use-case for it, has strong late-bubble vibes to it — the sort of vibes which become contagious shortly before a fall.

Barring a dramatic escalation — say a mass casualty event that takes the war into an entirely new phase, the closure of oil shipping lanes, attacks on Western or other regional forces — this Middle East war may not pose a 1973-style shock to the world economy. But it has uncovered the looming problems in the Western economies, and highlighted the growing risks to future growth. The longer the war continues, the worse that will get, so the US — which will ultimately be decisive — will have an interest in bringing the conflict to a rapid conclusion. Whether or not Trump proves able to do that, though, will reveal how far the hegemon has fallen.

It was classic Trump, the Presidential candidate who fashioned himself as a friend of Big Oil, promising to free up the nation’s stores of liquid gold and secure America’s “energy dominance”. Thanks to Biden’s pause, which yesterday crescendoed into a ban, on new oil and gas leases, along with his restrictive environmentalist agenda, America’s stocks have been kept in reserve. And Trump wants to exploit them.

But does this mean the US can expect another oil boom? Not so fast.

In America, the oil business is identified in the public mind with individual Texas oil men and their families. Think Hollywood movies like Giant (1956), starring Rock Hudson and James Dean, and the Eighties TV soap opera Dallas, whose Machiavellian antihero, J.R. Ewing, was portrayed by the late Larry Hagman (who happens to be my cousin twice removed). Today, the hybridisation of pop culture and petroculture continues with Landman, starring Billy Bob Thornton as a jack-of-all-trades working for an oil company.

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By Michael Lind

The Texas connection is no myth. Only five American states produced 70% of US natural gas in 2023, with Texas producing 28% of the total, the same as the next two — Pennsylvania and Louisiana — combined. And from the Thirties to the Seventies, the Texas Railroad Commission helped to set world oil prices with its production quotas in the state.

However, this has never just been an American tale. From its origins in the 19th century, the oil industry in the US has been dominated by multinational corporations and subordinated to great power politics.

During the Fifties, when Giant played on movie screens, global oil prices were largely controlled by the cartel known as the “Seven Sisters”. And in the early Cold War, these companies — which included the predecessors of ExxonMobil, Texaco and British Petroleum — were partners with the US, UK and other Western governments. Indeed, during this period, petropolitics was geopolitics, leading to interventions such as the Western-backed coup that overthrew Iran’s democratic government and installed the autocratic Shah of Iran in 1953.

Over the following decade, Saudi Arabia and other oil-producing countries formed OPEC and demonstrated their collective power with the oil embargo of 1973 against the US and other allies of Israel during the Yom Kippur War. It was during this era, in Television Land, that J.R. Ewing hired a mercenary named B.D. Calhoun to blow up oil fields in the Middle East.

Back in the real world, however, foreign state capitalism won out over American-style private capitalism. Today, three-quarters of the world’s oil reserves are controlled by state-owned national oil companies. The largest, by revenue, are two Chinese companies, Saudi Arabia’s Saudi Aramco, Russia’s Rosneft, Brazil’s Petrobras, and India’s Indian Oil Corporation (IOCL). America, suffice it to say, does not compete.

Today’s Landman series, like the re-run of the Trump presidency, takes place in an era when high-tech hydraulic fracturing — the use of huge quantities of water to flush out “shale oil” and “shale gas” — has transformed the American fossil fuel industry and the global market. But geopolitics still rules the oil patch. More than 80% of the world’s oil reserves are controlled by the 13 members of OPEC, which produces 40% of all crude oil and 60% of global petroleum exports. And those members of OPEC — along with their expanded group OPEC+, which was created in 2016 — are not afraid to flex its muscles. After sanctions were placed on OPEC+ member Russia following its invasion of Ukraine, China helped Moscow by replacing Saudi Arabia with Russia as its largest foreign source of crude oil.

Meanwhile, pipeline politics also remain geopolitics. Shortly after President Biden vowed to “bring an end” to the Nord Stream 2 natural gas pipeline if Russia invaded Ukraine, explosions rendered the undersea pipeline useless in September 2022. Washington and allied Nato governments professed to be mystified; last August, however, The Wall Street Journal reported the sabotage was carried out by Ukrainian saboteurs. Around the same time, the Chinese government claimed that a Hong Kong-flagged ship in the Baltic had destroyed a critical pipeline in the Baltic between Estonia and Finland. It was, needless to say, “by accident”. The late J.R. Ewing no doubt is smiling somewhere. Trump, by contrast, is surely not.

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For in addition to having to deal with state-owned oil companies and the shifting alliances of our new Cold War, the incoming President can also expect resistance from inside the oil industry and investment world. The American Petroleum Institute, the main oil and gas lobby, opposes Trump’s threat to impose 25% tariffs on imports from Canada and Mexico, including energy imports. Elsewhere, the major oil companies, which rely on delicate international deals, are unlikely to approve of Trump’s cowboy diplomacy, including his threat to impose tariffs on the EU if it fails to buy more oil and gas from the US.

Yet Trump doesn’t seem to recognise this, declaring instead that, “if they drill themselves out of business, I don’t give a damn”. Strong words, indeed, but ones that overlook the fact that not even the President of the United States can force private oil companies to ramp up drilling.

Instead, Trump is left with an oily irony: if he wants to secure America’s energy dominance, he’ll have to imitate every other global competitor and create a state-owned oil and gas company. History teaches us that black gold will never be tamed by one man alone. Forget Texaco — and bring on the age of Americo.

But if renewed US action could hamstring the ayatollahs’ economy, sanctions are already being undermined: and not just by the Islamic Republic. I’ve obtained documents from confidential sources showing the illicit export of Iranian oil, a scheme involving foreign banks and shipping firms. And if these activities are sure to bolster a brutal regime in need of hard cash, they’re also funding chaos right across the region, even as shutting off the tap could yet spark a geopolitical revolution.

Iranian oil is big business. In 2023, total sales of its petrochemical products were worth some $70 billion. Listen to the regime, and it heralds this activity as a source of civilian prosperity. But dig a little deeper and things soon get murky. One of the major companies behind the Iranian oil sector is the National Iranian Oil Company (NIOC). According to the US government, this state-owned firm is an “agent or affiliate” of the Islamic Revolutionary Guard Corps (IRGC), the organisation that funds and controls Hezbollah, Hamas and the Houthis.

Nefarious activities like these doubtless explain why the Islamic Republic is so worried about Trump’s second presidency. “I think they’re scared,” says Behnam Ben Taleblu, director of the Iran programme at the Foundation for Defense of Democracies in Washington. “Iran tried to kill Trump and failed,” he continues, referring to an alleged plot on US soil. “And it knows that after the inauguration, it can expect a return to the policy of “maximum pressure” Trump applied in his first term — with potentially devastating political and economic consequences.”

Certainly, the numbers show the relatively easy ride Iran has enjoyed under President Biden. Four years of Democratic rule has seen Iranian oil exports more than treble, from 400,000 barrels a day in 2020 to an average of over 1.5 million barrels a day this year.

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Yet as my documents show, sanctions-busting was happening even while Trump first occupied the White House.

The first batch relates to five vessels used to carry Iranian oil, and owned by the Greek shipping magnate George Gialozoglou and firms controlled by his family. In August 2020, the US authorities intercepted four of Gialozoglou’s ships, operated by his International Marine Services firm, as they sailed to Venezuela. The Department of Justice said they were carrying almost 1.2 million barrels, then worth some $50 million, and described the operation as “the successful disruption of a multimillion dollar fuel shipment by the IRGC, a designated foreign terrorist organization”.

After the cargoes were impounded, Gialozoglou said he had believed they were “legitimate” — and that being caught in breach of US sanctions was a “nightmare”. He added that he had no intention of flouting the rules, and had allowed the US to seize the oil because he did not wish to break the law.

Earlier this year, meanwhile, I revealed a further, earlier oil shipment, this time from 2019. Made by the Victor 1, which had been leased from another Gialazoglou company, its organisers produced a fake manifest suggesting it had been loaded in Iraq. Genuine documents instead prove it came from Bandar Abbas in Iran, even as crew members disabled the ship’s transponder to stop it being tracked.

When I approached Gialozoglou about this shipment, his lawyer said he couldn’t comment. Yet he later became embroiled in a legal dispute with Ceto, the Gulf-based firm that had leased the ship. Documents filed by Ceto, in the High Court in London, claim Gialazoglou had been aware his vessel was handling Iranian oil, and had asked for a $1 million bonus for doing so. He and his lawyers deny this, and the case has not yet been tried.

However that story ends, a new batch of documents also sheds light on how bankers may facilitate the global trade in Iranian oil too.

They suggest that payments totalling millions of dollars, relating both to the Victor 1 and the four vessels whose cargoes were seized, were handled by Eurobank Ergasias. Headquartered in Athens, this is one Greece’s biggest banks, with assets worth $100 billion.

I asked the bank whether it had been aware that the payments it handled related to Iranian oil, what due diligence checks it had carried out, and whether it had continued to do business with Gialozoglou after his ships were seized. Its spokesman declined to answer, saying “it is our policy” not to comment on specific customer relationships. The bank, he went on, was committed to upholding “all applicable legal and regulatory standards” and had “rigorous compliance frameworks” to ensure all transactions were “monitored”.

Nor is Eurobank Ergasias the only bank involved here. The documents cover several other transactions over the period 2019-23, each worth millions of dollars and involving everything from the lease of a drilling rig to shipments of Iranian oil products from Bandar Abbas. The specifics encompass a complex mix of energy firms and financial institutions: but many are ultimately linked to Kuwait Finance House (KFH), part-owned by the Kuwaiti government and one of the world’s leading Islamic banks. I approached Kuwait Finance House, as well as the other institutions and banks named in the documents, attaching the relevant papers in my emails. None of them replied.

In theory, of course, the Americans have various ways to tackle sanction busters. Beyond seizing the relevant vessels or their cargoes — as they did to those Venezuela-bound ships in 2020 — they can also impose what’s known as “secondary sanctions”. This means slapping sanctions on any firm or individual trading oil with Iran, freezing their assets in the US and fining or charging any American citizen doing business with them.

In theory, again, the rules here are strict: a sanctions expert tells me that merely pricing deals involving Iranian oil in US dollars could make an overseas company or bank “easy prey” if Trump chose to reinstate his “maximum pressure” campaign.

Yet as the documents vividly show, the gap between theory and practice is vast. Quite aside from industry ruses — fake manifests and muddled webs of ownership — International Marine Services has never been subject to US sanctions. Neither has Eurobank Ergasias, something also true of the other entities mentioned in the documents.

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Not that the situation is hopeless. In recent months, the Biden administration has tried to prevent Iran from selling black gold. In October, for instance, it sanctioned 10 overseas transport and energy firms, based in countries including the UAE and Liberia. Earlier this month, it placed a further 35 “entities and vessels” on its sanctions list.

Trump, for his part, is again promising to get tough. Sources close to him reportedly say that this time, he plans to “bankrupt Iran as soon as possible”.

Success here could have broad repercussions. The elimination of Hezbollah’s leadership in Lebanon, and the degradation of its military assets by Israeli airstrikes, has already precipitated the fall of Assad in Syria. Without a crucial ally in the region, that leaves the Iranian regime weaker and more vulnerable than it’s been for decades — and this, say British Foreign Office sources, at a time when its internal popularity is at an all-time low. With stakes like these, no wonder Ben Taleblu argues that, had Trump’s maximum pressure strategy been rigorously enforced during the Biden era, the Middle East would not now be embroiled in the wars that started on October 7 last year.

Yet while Republicans are sure to take the Iranian threat more seriously than their Democratic forebears, actually stopping the flow of illicit oil won’t be easy. “This involves more than just consumers,” says Norman Roule, a 35-year CIA veteran and now senior adviser to the campaigning think tank United Against a Nuclear Iran. “It requires clear and stringent standards to ensure international banks aren’t facilitating financial transfers associated with illegal oil sales.”

For that to happen, Roule adds, the US should immediately judge any transaction with Iran as dubious — even as Washington must also push other governments to take their responsibilities seriously. Maximum pressure, it seems, will involve a joint effort.

That is true both in terms of scale, which was vast and could have killed 20,000 Israelis, were it not for the advanced Arrow interceptors, and in its very meagre results. A Gazan Palestinian died in the West Bank, and debris from intercepted missiles caused widespread but only superficial damage to civilian houses and airforce bases. Certainly, Israel will not dispatch its pilots all the way to Iran without destroying targets that materially weaken the Islamic Republic’s military capabilities. 

Not that Israel can act alone in choosing its targets. For while the US fully accepts that Netanyahu must respond for the sake of deterrence, the Biden Administration is equally reluctant to give the IDF carte blanche. For one thing, the White House doesn’t want Israel to attack Iran’s nuclear installations. Even now, those officials who run Biden’s foreign policy cling to their dream of reconciliation with Tehran, believing that all would now be well if only Trump had stuck by the nuclear agreement negotiated by Obama, their former boss. 

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To persist in that fantasy, of course, they’re obliged to ignore what Iran did with all the oil money it gained after US sanctions were lifted: the great build-up of Hezbollah, the Houthis and the other Shi’a militias; the large-scale importation of missile components from North Korea and China; and the growth of the Revolutionary Guard.

It’s clear, then, that Iran’s rulers were never interested in making peace with Washington. Nor, indeed, could they do so without losing power to the secular opposition now bitterly hostile to the Ayatollah’s rule. Still, because of the persistence of the Obama delusion, Israel is forbidden from attacking the Natanz centrifuge complex, where Iran enriches its uranium to weapons-grade levels. The Isfahan uranium hexafluoride plant, whose destruction would release highly corrosive radioactive gases, is also out of bounds, as is the Fordow centrifuge hall — deep inside a mountain and safe from bombs, but which could nonetheless be wrecked by air-to-ground missiles.

If the nuclear installations cannot be attacked, there is still the Khark Island oil terminal that delivers most of Iran’s exported oil, and which provides the foreign currency that Iran uses to import missile parts and pay its Shi’a proxies. Hezbollah, which even under Israeli bombardment relies on Iranian paychecks, is the most obvious example. But there’s also the Iraqi Kataeb militia, as well as the Houthis in western Yemen. Quite apart from the threat they pose to Israel, that last group has successfully disrupted much of the Mediterranean’s trade with Asia, even as European navies have sat back and watched. 

Beyond immediately weakening the militias — if unpaid, their men must find work elsewhere — bombing the Khark terminal would also accelerate Iran’s catastrophic inflation. Right now, it takes 42,105 rials to buy one dollar, up from 70 rials when the Islamic Republic was founded in 1979. That, in turn, would further increase opposition to the regime. After all, millions of salaried employees in Tehran already cannot afford proper meals for two weeks of every month, as modest salary increases are immediately outpaced by bewildering jumps in prices.  

Yet whatever the tactical and strategic advantages of destroying the Khark terminal platform, Biden officials oppose that too. Why? In essence, because they’ve been spooked by Iran’s not-so-veiled threat to bomb Saudi Arabia’s gigantic terminal at Ras Tanura. Handling over 15% of the world’s total oil supply, any disruption here would disrupt the world economy at a stroke.

But Saudi Arabia is not Israel, nor is it Israel’s ally. There’s therefore no earthly justification for Iran’s threat, beyond an outrageous attempt at blackmail by a regime tripped up by its own boastful propaganda. Even now, Iranian radio and television channels claim that 90% of the ballistic and hypersonic missiles launched at the “Occupied Territories” (their dismissive term for Israel) successfully struck their targets. Among other things, the Revolutionary Guards claimed a direct hit on the Mossad headquarters just north of Tel Aviv, which they said were “completely destroyed”. That in itself shows the regime is rattled: its propaganda lies might be just about plausible to the people of Iran, but anyone who actually drove past Mossad’s building could see it’s perfectly intact.

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Having sailed too close to the wind by attacking Israel with hundreds of missiles — notably the Fattah-1 variety, which reach hypersonic speeds and are devilishly hard to intercept — Iran’s rulers are now desperate to avoid the consequences of their actions. In so doing, they’re threatening their own Saudi neighbours, with whom they recently reconciled after years of tension. After years of indulgence, the Biden Administration must finally stand up for US and Western interests. It must make it perfectly plain that an Iranian attack on the Saudis, or indeed any other Arab oil terminal, will result in massive retaliation. Nor can this be an idle threat: each US Air Force’s B52, taking off from Diego Garcia, could drop some 70,000 pounds of bombs anywhere in Iran.

To issue such a threat would certainly be an abrupt reversal after years of appeasement, and would not be an easy pivot for an ageing president at the end of his term. But the alternative would be to surrender to Iran’s blackmail, a decision that would soon destroy American power across the Middle East. Israel, fighting for its basic security and under attack by Iranian proxies to its north, east and south, is bound to act decisively and will not be stopped. So it is Iran that must finally be deterred from further destabilising the region — and the global economy at large.         

This was a formidable threat to Israel’s survival in its first decades. But nobody there even considered the possibility of striking directly at the Soviet Union itself. Aside from the certainty of a massive retaliatory response, there were simply no relevant targets that Israel could strike, even if its small airforce managed to penetrate Soviet airspace. These days, however, everything is different. The Shi’a militias that have been targeting Israel for years, which greatly escalated their attacks after October 7, are entirely armed and directed by Iran. That’s true right across the Middle East, from Hezbollah in Lebanon and the Houthis in Yemen to a pair of militias in Iraq. But unlike the Soviet Union, Tehran enjoys no immunity from Israeli action.

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The crucial vulnerability is the money from Iran that sustains the militias. Iraq’s Shi’a fighters can extort some cash from the country’s oil revenues. Hezbollah, for its part, receives some funding from Shi’a diamond buyers in Sierra Leone and smugglers in South America. Yet over the years, it and its cousins elsewhere in the region have become increasingly reliant on the funding they receive from their paymasters in Tehran. Cut the cash off, then, and they will quickly wither because even the most committed must receive their pay to feed their families.

That is most obviously the case in Yemen, one of the world’s least productive countries, where the Houthis are funded by monthly payments from Iran. But Hezbollah too has become more reliant on its Iranian ally, not least because its extortion of airport and customs receipts has yielded less and less with Lebanon’s descent into poverty.

This all means that Iran’s export revenues must now pay for a bewildering range of military expenditures abroad, in US dollars rather than home-made rials. Beyond the upkeep of foreign allies starting with Hezbollah, there are the imported components and supplies consumed by the domestic Revolutionary Guards, with its 125,000 troops and a naval force. This includes the imports of Chinese and North Korean missile and rocket components, as well as the foreign-currency costs of the entire nuclear programme which proceeds at a very large scale.

In practice, most of this cash comes from a single source: oil. It’s true that Iranian farmers grow pistachio nuts and other exportable crops, and that there are some manufacturing exports, even if Tabriz’s famous carpets are out of fashion. Yet at the last count, in 2023, oil accounted for 83% of Iran’s exports. For their part, the merchants who export Iran’s agricultural and craft exports tend not to repatriate the foreign currency they earn, using it instead for the imports they bring in. While much celebrated in regime propaganda, meanwhile, state-controlled industrial exports remain slight.

In other words, the flow of dollars that sustains Israel’s enemies, and which has caused so much trouble to Western interests from the Syrian desert to the Red Sea, emanates almost entirely from the oil loaded onto tankers at the export terminal on Khark Island, a speck of land about 25 kilometres off Iran’s southern coast. Benjamin Netanyahu warned in his recent speech to the UN General Assembly that Israel’s “long arm” can reach them too. Indeed, Khark’s location in the Persian Gulf is relatively close. At 1,516 kilometres from Israel’s main airbase, it’s far closer than the Houthis’ main oil import terminal at Hodeidah in Yemen — a place that was destroyed by Israeli jets in July, and attacked again yesterday.

Iran has made great efforts to reduce its dependence on the Khark terminal. That’s not because it is too close to Israel, but rather because it was too close to Iraq, and was indeed attacked and burned during the Iran-Iraq war. The result it Iran’s newly opened Jask oil terminal. Out on the shores of the Indian Ocean, it’s much futher from Israel than Khark. But for the IDF’s air planners, that’s scarcely a problem: the oil reaches Jask by a very long pipeline that can be disrupted at points even closer to Israel than Khark Island.

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Given that Israel could easily cut off Iranian funding for Hezbollah and its other enemies by doing so, why has it refrained from targeting the country’s oil exports? In one phrase: “Obama’s Law”. Tacitly but very forcefully promulgated by the former president, it banned any Israeli or US attacks against Iran, even as the Islamic Republic has continued to kill US soldiers in Iraq and Yemen, and has kept attacking Israel through its proxies. On 13 April, Iran even attacked Israel directly. Stemming from Obama’s great fear that he would be manipulated into going to war against Iran, just as his predecessor was talked into war with Iraq, the then president’s all-out pursuit of a historic reconciliation with Iran utterly ignored the simple fact that the Islamic Republic’s fanatical rulers could not possibly be reconciled with the West. With Obama’s people also staffing Biden’s White House, the US has persisted with this policy of one-sided restraint, which it also imposed on Israel. That’s even as the Ayatollah’s regime has continued to forcibly suppress a pro-Western opposition that hates its corrupt and wasteful rule with a passion. Nor did US policy change when Iran continued to target US allies in Saudi Arabia and elsewhere. 

In the event of a Harris victory this November, the Obama crowd would continue to staff the White House. That leaves a narrow window for Israeli action against Iran. To be sure, attacking a vast country of 91 million people would be a reckless act for Israel under any circumstances. But to stop Iran’s oil revenues — whose benefits are denied to its long-suffering population by an oppressive regime that most Iranians bitterly oppose — is quite another matter. Given, moreover, that hyperinflation has brought outright hunger to Iran’s urban population for the first time since the fall of the Shah in 1979, an attack on the country’s oil exports could even trigger the downfall of the regime. There are, of course, very many variables between any Israeli action and such a happy consequence. But if destroying Iran’s oil revenue did finally bring about the end of the Ayatollah regime, it’s not just Netanyahu who would celebrate. 

Perhaps the most financially destructive aspect of any military occupation is the appropriation of natural resources. And Israel’s is no exception. Most obviously, this has assumed the form of Israel taking control of (or rendering inaccessible to Palestinians) much of the West Bank and Gaza’s cultivable land and water supplies. In other words, despite the establishment of the Palestinian Authority (PA) in the Nineties, the Palestinian people have never truly had control over their resources and their economy. This, on top of severe restrictions on the movement of people, labour and goods, has taken a very heavy toll on the Palestinian economy.

Less well-known, however, is Israel’s appropriation of the Palestinian Territory’s vast reservoirs of oil and natural gas. On its border with the West Bank, for instance, lies Israel’s largest onshore oil field, which Israel states is located west of the armistice line of 1948 — even though most of it is situated beneath Palestinian territory occupied since 1967.

Yet the site of the most controversial “energy war” between Israel and Palestine is not in the West Bank — but Gaza. In 1999, British Gas Group (BGG) discovered a large gas field (Gaza Marine) at a distance of 17 to 21 nautical miles off the coast of Gaza. This placed it within the bounds of the Oslo II Accord, signed in 1995, which gave the PA maritime jurisdiction over its waters up to 20 nautical miles from the coast. Following the discovery of the gas field, the PA signed a 25-year contract for gas exploration with BGG, and, in 2000, the company drilled two wells in the field, which was estimated to contain 1.4 trillion cubic feet of natural gas — more than enough to satisfy the Palestinian Territory’s energy needs, and generate significant export revenue flows.

It looked like, after much misfortune, the Palestinian people had finally struck gold. On 27 September 2000, after symbolically lighting the flame at the BGG offshore exploration platform, Yasser Arafat, then president of the PA, hailed the discovery as “a gift from God”, one which would “provide a solid foundation for our economy and for establishing an independent state”.

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God, however, had other plans: within two days, the Second Intifada had broken out. And the following year, Ariel Sharon, an ultranationalist, won the elections and used the unrest to block the Gaza Marine development project, claiming the profits risked being channelled to Hamas and other militant groups.

In the following years, little was done to bolster the Palestinian economy. Instead, successive Israeli governments insisted that the gas be piped to a refinery located within their territory, thus giving Israel control over the revenues from the Gaza gas fields. In the early 2000s, even Tony Blair, then prime minister, got involved, convincing the Palestinians to agree to send the proceeds from the natural gas reservoirs to the Federal Reserve Bank in New York to be vetted, to ensure that the money didn’t fall into the hands of armed resistance groups.

But Israel continued to drag its feet — and finally broke off all negotiations following Hamas’s takeover of Gaza in 2007. A crucial turning point came the following year, when Israel launched a military operation in the strip, after which Israel militarised the entire Gazan coastline and effectively brought under its control the Gaza natural gas field, in contravention of international law. From that moment onwards, BGG started dealing directly with the Israeli government. But for several years, largely due to recurrent hostilities between Israel and Hamas, there was hardly any progress on the project.

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This has resulted in accumulated losses to the Palestinians in the billions of dollars. “The occupation continues to prevent Palestinians from developing their energy fields so as to exploit and benefit from such assets,” the United Nations Conference on Trade and Development observed in 2019. “Accordingly, the Palestinian people have been denied the benefits of using this natural resource to finance socioeconomic development and meet their need for energy over this entire period, and counting.”

After Russia’s invasion of Ukraine, however, the project was revived. As Europe started desperately scouring the world for alternatives to Russian gas, Netanyahu saw a perfect opportunity to crown his long-held dream of transforming Israel into a regional energy hub and major energy exporter. This is a fairly recent development. Since its creation in 1948, Israel has been heavily dependent on energy imports from other countries.

In 2009 and 2010, however, Israel discovered two massive natural gas fields off its coast, in its self-declared exclusive economic zone: the Tamar and Leviathan gas fields, with overall estimated reserves of around 30 trillion cubic feet of natural gas. This markedly shifted the regional gas market’s geopolitical dynamics: in a decade, Israel went from net gas importer to exporter — mostly to Egypt and Jordan.

However, the real market Israel has always eyed is Europe. To this end, several pipeline projects have been considered — including an offshore pipeline from Israel to Turkey, which would then link up with the Baku-Tbilisi-Ceyhan (BTC) pipeline, and the so-called EastMed pipeline, which would connect Israel to mainland Greece via Cyprus and then meet the proposed Poseidon pipeline running across the Ionian Sea to Italy.

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The Russia-Ukraine war gave fresh impetus to all these projects — including the development of the Gaza Marine field. In June, Israel gave preliminary approval to a $1.4 billion project involving the Palestinian Authority, Egypt, Israel and Hamas aimed at developing the Gaza gas reserves. Under the agreement, revenue — estimated to reach $700-800 million a year — would have gone to the PA with an agreed portion used to support Gaza’s economy. The project was hailed as “a rare glimpse of a potential win-win opportunity” for both Gazans and Israelis.

Unsurprisingly, the re-explosion of the Israel-Hamas conflict has put the deal on hold once again — and it’s hard to see how it could be revived soon, given the lack of any political solution to the war on the horizon. Indeed, several commentators have argued that seizing control of the gas field is the real reason behind Israel’s war in Gaza. Seyed Hossein Mousavian, a Middle East Security and Nuclear Policy Specialist at Princeton University, recently wrote that “the ultimate objective is not only to demolish Hamas and/or exclude Palestinians from their homeland, but to confiscate Gaza’s multi-billion-dollar gas resources”.

Frankly, this argument doesn’t hold: as noted, Israel already effectively controlled the Gaza coastline, including the gas field, prior to the conflict. Moreover, the reserves contained in the Gaza Marine field pale in comparison to those of the massive Leviathan and Tamar fields, Israel’s main gas resource. And indeed, it is in the Leviathan field that the Israeli Energy Minister recently granted 12 licences to six companies, including BP and Italy’s Eni. In reality, then, the Gaza Marine field seems rather tangential to Israel’s energy policy and its grand geo-strategic plans.

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And yet, it does remain crucial to the future of Israeli-Palestinian relations. This is why the US is now pushing Israel to revive the deal. “There is an opportunity here to develop the gas fields in offshore Gaza, on behalf of the Palestinians,” Amos Hochstein, Biden’s energy security advisor, said during a visit to Israel last month. Hochstein noted that he was “100%” sure Israel would allow this, adding that “there is no reason for them not to — it is not theirs [the Israelis], the gas belongs to the Palestinian people”.

As desperate as the Biden administration may be to avoid the conflict escalating into an all-out regional war, Hochstein’s words are little more than wishful thinking. For decades, it’s been clear that, as long as a lasting political settlement is out of reach, the gas off Gaza’s coast will remain under the sea and out of Palestinian control. Witness today’s war, and one can only conclude that their desire for development will remain thwarted.

The reality, however, is much grimmer. What has landed us here is a combination of three of the Biden administration’s signature policies — its aggressive support for ESG, its proxy war against Russia, and its sabre-rattling approach to China. The result is that the US is now in an energy chokehold right when the country needs as many options as possible.

After nearly two years of biting inflation, developed nations are starting to believe that the beast of relentlessly rising prices has been tamed. But as oil prices again barrel towards $100 — with one industry CEO predicting it could reach a devastating $150 — that could be about to change. Earlier this month, Saudi Arabia announced that it would extend a July production cut of one million barrels a day through the end of 2023. On its own, this news is bad enough. What makes it worse is that the Saudis are now apparently coordinating energy policy with America’s enemy number one, Russia, which has cut 300,000 barrels a day for the same period.

For Joe Biden, the timing couldn’t be worse. He is polling neck and neck with Donald Trump, and is facing an onslaught of challenges from House Republicans related to the business dealings of his son, Hunter. But from a policy point of view, the news is far more serious. The causes of surging oil prices trace back to structural changes Biden made to the economy, combined with now intractable foreign policy commitments, which, this late in the game, cannot be easily undone.

Those decisions go back to Biden’s very first day in office. On 20 January 2021, the new president signed an executive order revoking a permit required for the Keystone XL, an extension of an existing pipeline that would have transported an extra 830,000 barrels per day from Canadian oil fields to refineries in Texas. The move had its roots in Biden’s campaign strategy, which positioned Biden as a “climate change pioneer”. According to the text of Biden’s executive order: “The United States and the world face a climate crisis. That crisis must be met with action on a scale and at a speed commensurate with the need to avoid setting the world on a dangerous, potentially catastrophic, climate trajectory.” The Keystone XL pipeline “disserves” American interests, Biden said.

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The media bolstered the decision, arguing that, with oil then trading at around $60 per barrel, the pipeline was not economically viable. But it would take just five months for oil to rise 50% to around $80, and a little more than a year for the price of oil to double to about $120 per barrel, pushing inflation up significantly. More importantly, Biden’s executive order and the decision by developers to abandon the pipeline signalled a shift in the policy winds on US energy and oil exploration. With the price of oil rising and the government taking an aggressive ESG-minded position on domestic exploration and development, oil producers went from investing in technologies such as new shale extraction methods to a new mode of profit-taking, where innovation is stopped in favour of extracting the profit from previous years’ investments.

When Biden signed the order, there was little or no inflation on the horizon. By the spring of that year, when inflation jumped to 4% and kept rising — with oil prices tracking it, resulting in a 50% jump in prices at the pump — the administration seemed to grow desperate. In November 2021, Biden began tapping the Strategic Petroleum Reserve, a reservoir of oil meant to weather the country through war. This began with an initial release of 50 million barrels (out of a total capacity of 714 million), in the hope that the move would lower fuel prices and curb inflation. It didn’t. Over the course of the subsequent year, Biden would release another 180 million barrels of oil from the SPR, leaving the SPR at its lowest level in four decades.

If the White House appeared desperate in the winter of 2021, the following spring would bring about a series of events that would make the most powerful government in the world look like a third-rate power. In March last year, hoping to secure a promise by Gulf producers to increase production, Biden reached out to Mohammed Bin Salman, the de facto ruler of Saudi Arabia, and the UAE’s Sheikh Mohammed bin Zayed al Nahyan. Astonishingly, both men declined to take the call.

While Opec+ lives up to its role as the world’s most powerful oil cartel, there generally has been enough wiggle room for American presidents to influence Saudi production. This is partly because, for the past three decades, Saudi Arabia has been more of a reformed American ally than a leverage-pushing adversary. The Saudis lowered prices in response to a lobbying effort by President George W. Bush in 2004 — a success quickly spun by the anti-Bush media as a Saudi attempt to interfere in US elections and “buy” the president — and again in 2008. Most importantly, whether or not they complied, and in some cases they didn’t, they were willing to hear the American president out.

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The reasons for Biden’s fall from the Gulf’s graces can be traced back to his role in leading aspects of foreign policy in the Obama White House. Specifically, Obama relied on Biden to advance and pass the nuclear deal with Iran which, in exchange for the removal of US sanctions, would see Iran slowing development of its nuclear programme and open it to international inspections. The Saudis, along with other Gulf allies, considered the deal a betrayal that endangered their national security.

After Trump scuppered the deal, Biden campaigned on reinstating it. In the context of Biden’s other Gulf-related campaign pledge — to turn Saudi Arabia into a “pariah” — and the barrages of missiles falling on Saudi Arabia from Iran-backed rebels in Yemen (which Trump also permitted without any significant action), the move seemed to double down on Obama-era fecklessness, leading to Saudi Arabia and UAE’s decision to not only refuse to increase oil production but to not pick up the phone.

By last October, Biden’s administration had no choice but to U-turn as it came out calling for an increase in US oil production. “You should be using these record-breaking profits to increase production and refining,” Biden said at an October 2022 press conference. That, however, was no longer possible. The stock of cheap, easy-to-access shale had been pulled out of the ground, exhausting the country’s ability to continue ramping up production. And the Keystone pipeline extension that would have brought nearly one million barrels a day from Canada to Texas had been cancelled — by Biden.

While the administration was attempting to retrofit its energy policy, it was formulating the most aggressive economic response to a foreign war in memory. In April 2022, two months after Russia invaded Ukraine, the administration unleashed what it accurately characterised as “unprecedented sanctions” against Russia. Biden claimed that, already, the sanctions were achieving the administration’s intended effect of “devastating” Russia’s economy.

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Biden had resisted taking the most drastic economic step of banning Russian banks from Swift, a key component in the international banking system that allows banks in different countries to transact with each other. Biden cited oil prices as one reason, since without the ability to purchase Russian oil in dollars via Swift, Western allies would effectively be removing the country’s oil production from the global pool.

Yet while the US media reported on 25 February 2022 that Biden had rebuffed calls, including from some Democrats, for the Swift ban, the the very next day, the White House and its European allies announced that a number of Russian banks would indeed be blocked from it. A White House official told CNN that the move, which Biden had nixed just 48 hours earlier at a press conference, was an “unprecedented act of global sanctions coordination”.

Predictably, within days, the price of oil had risen by 25%. It would continue to rise, eventually hitting a decade-high at $120 per barrel. But beyond oil prices, the sanctions culminating in the Swift ban presented another risk, this one strategic. On a G7 call prior to the decision, some allies of the economic block voiced the fear that, as the Financial Times reported, “removing Russia from Swift would accelerate efforts by it and China to create rival payment systems that did not use the US dollar”.

It took only a few weeks for China to capitalise on exactly this vulnerability. In March, China and Saudi Arabia began talks concerning settling oil transactions between the two countries in renminbi. By the end of the year, China turned this into an international strategy as President Xi Jinping “opened the door to trading crude oil and natural gas” in renminbi, as S&P Global reported in a December market insight report.

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At the time, there was intense scepticism regarding whether China would be able to pull this off in a meaningful fashion — and for good reason. China’s capital controls, its fixed currency and a relatively shallow and illiquid capital market, relative to the dollar, have made investors wary of parking their capital in renminbi-denominated accounts.

But that was before the US leveraged the dollar as an economic weapon against a country it was not even at war with. Today, the picture is changing. In March, China completed its first liquefied natural gas trade in yuan, in this case with the UAE. The yuan is now the dominant currency for China’s own cross-border payments, a first in the country’s modern history. Brazil and Argentina announced this year they would allow renminbi payments in transactions with China. Perhaps most significantly of all, over the past year, China has paid for almost all its Russian oil in its own currency.

In case China did not have enough reason to attempt a restructuring of global trade, Biden, in the midst of Chinese efforts to shift international payments to the yuan, publicly stated that the US would respond with military force if China were to invade Taiwan. This was a break with decades of US policy, and while the administration walked back the claims the next day, it would not take a leap of imagination on the part of Chinese officials to wonder how the US would leverage the country’s role as the backbone of global trade to alter the balance of power.

This is not evidence of the kind of de-dollarisation that China and other nations have sought for decades. But it does signal a new approach to strategic relations between countries such as China and Russia — and one that has come at the severe cost of America’s ability to influence oil prices. China and Russia are now not just allies, but economically bound to each other. Russia is no longer isolated but at the centre of a new axis of power. Worst of all, even the most extreme sanctions and complete weaponisation of the dollar have proved, if not ineffectual, then at least unable to achieve their strategic aims.

And, of course, winter is coming. With oil prices soaring, the US unable to meaningfully increase production, and Ukraine mired in a faltering counter-offensive, it seems that Biden’s most virtue-signalling policies will have the effect of simultaneously limiting the country’s options on trade, energy and foreign policy. The smart move would be to tap out by walking back one (if not all) of these policies. But with the US careening into an election year and Democrats alarmed by a slate of recent polls, for Biden failure may be the only option.

But the question remains: what does MBS want? At the heart of all Saudi foreign and domestic policy is the instinct to preserve the Al Saud dynasty. The monarchy has sought to achieve this in three ways: by providing security for the Saudi people, by promoting economic development, and by protecting Islam. Foreign policy has played an important role in meeting all three objectives.

Towards this end, King Salman and his son MBS have been racing to diversify the Saudi economy away from oil and bring its social policies more in line with global norms. Though this transformation plan, known as Vision 2030, clearly indicates a shift in tactics, the overall strategic objectives of Saudi foreign policy remain largely the same as ever.

Saudi foreign policy cannot be properly understood without a grasp of its volatile regional politics, characterised by hostility between Sunni and Shia Muslim states and, of course, the Arab-Israeli conflict. Saudi Arabia has borders with eight different nations and must defend two long coastlines with limited manpower. In previous decades, Egypt, Iraq, and Israel have stirred up trouble for the Saudis; today, the most likely threats come from Iran, Yemen and the likes of Al-Qaeda and Isis.

The Islamic Republic of Iran, an aggressive, terrorism-sponsoring regime, is an unfortunate neighbour to have. It has challenged Saudi interests in Iraq, Syria, Lebanon, and Yemen through the use of violent proxy forces such as Hezbollah and the Houthis, and its large missile forces sit within easy range of Saudi Arabia’s critical oil and desalination facilities. At times, it has even sought to delegitimise the Sunni Saudi administration of Mecca and disrupt the Hajj. But above all, many in Riyadh fear Tehran’s continuing efforts to enrich uranium.

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Yemen, an impoverished country with a population nearly as large as Saudi Arabia, poses a whole other set of problems. Riyadh has long been concerned about drug and weapons smuggling out of the civil war-stricken country, as well as illegal immigration. But now it fears that Al Qaeda forces pushed out of Saudi Arabia have reestablished themselves in Yemen. On top of this, Houthi insurgents in the country, who are armed and funded by Tehran, and harbour irredentist claims to southern Saudi Arabia, are threatening to establish an Iranian-aligned government on its southern border.

Yet it was Al Qaeda, not Iran or Yemen, that has come closest to overthrowing the Saudi government. Between 2003 and 2007, Al Qaeda launched a terrorist campaign that killed dozens of Saudi citizens and more than 100 Saudi police officers. It targeted oil facilities, government offices, and even the American consulate in Jeddah where five employees were killed. The Saudis are determined not to let this happen again, doing its utmost to challenge Al Qaeda’s ideology and prevent the establishment of foreign training camps and operations bases.

Faced with such threats, where does diplomacy fit in? Throughout its history, Saudi Arabia has relied on powerful friends for support. It is unlikely the nation would ever have been established without British political, financial, and military support in the aftermath of the First World War. And since the Second World War, American support has proved vital, especially when Egypt threatened Saudi Arabia’s border in the Sixties, and when Iraq did the same in the Nineties. Likewise, British and American counterterrorism assistance helped to defeat Al Qaeda in the Arabian Peninsula.

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Saudi foreign policy has also made astute use of its abundance of oil. No nation exerts greater influence on the price of oil — and therefore global energy prices — than Saudi Arabia, and it uses this to gain influence abroad. Not only has oil allowed this militarily-weak nation to maintain a global network of dependent customers, but its vast oil income means it can effectively distribute large amounts of cash to allies quickly and quietly. In their eyes, it is Riyadh’s ability to influence oil prices and finance its friends that has made it worth defending.

Yet oil money isn’t the only source of Saudi foreign influence: control over Mecca and Medina as well as the annual Hajj pilgrimage give it a unique position in the Muslim world. Like the Ottoman Sultans before them, Saudi kings have adopted the title Protector of the Two Holy Mosques, one of the most respected accolades in Islam. In the past, Saudi Arabia explicitly used religion to confront secular Arab nationalism in Egypt, Syria and Iraq, as well as during the atheist Soviet Union’s invasion of Afghanistan. Today, the Organisation of Islamic Cooperation, the Islamic Development Bank and the Muslim World League are all based in Saudi Arabia and are often used to promote its interests abroad.

When Salman bin Abdulaziz became King of Saudi Arabia in 2015, his mastery of diplomacy was immediately put to the test. At that time, the Arab world was in a state of chaos not seen since the 13th-century Mongol invasions: the continued existence of Lebanon, Libya, Syria and Yemen were in question; Isis had become the first terrorist organisation with its own capital city and oilfields, and Iran-backed Houthi insurgents had just seized Yemen’s capital of Sanaa and were on the verge of capturing the entire country.

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Yet Saudi Arabia’s traditional foreign policy tools were in poor condition. The Saudi budget was deep in the red, with oil prices ending the year below $40 a barrel. And Riyadh was alarmed by the alacrity with which the Obama administration had abandoned Egypt’s President Hosni Mubarak to the Arab Spring and withdrawn from Iraq. Those decisions had handed one of Saudi’s neighbours over to the Muslim Brotherhood and the other to Isis and Iran. On top of that, King Salman’s plans to modernise the economy and reform its society had placed him at odds with many conservative religious scholars. All of this was made worse in 2018 when the assassination of Khashoggi turned MBS into a global pariah.

Over the past few years, King Salman and his son have sought to revive Saudi’s fortunes. They have not abandoned the three traditional principles of Saudi foreign policy, but they have, however, significantly changed how they rely on allies, influence energy markets, and promote Islam.

Most obviously, in an increasingly multipolar world, the Saudis have adopted a multi-partner foreign policy. For much of its history, the kingdom was firmly aligned with the West economically and politically. While those relations remain important, they are no longer exclusive. Today, China is the kingdom’s largest trading partner, and it is the Chinese who have more recently developed the kingdom’s railroads, ports and telecommunications networks. Last year, Riyadh and Beijing officially raised the level of their relations to that of strategic partnership.

Elsewhere, in an effort to increase their influence over global energy markets, the Saudis have created a new partnership with Russia known as Opec Plus. Saudi energy policy always seeks to keep oil prices as high as possible without driving its customers into recession or promoting the development of alternative energy sources. Now, their expanded cartel has brought together the world’s two largest oil exporters. It has allowed Saudi Arabia and Russia to weather the Covid crisis and maintain higher oil prices than either could have done individually. It has also allowed Saudi to effectively remain neutral in the Ukraine war: it has provided financial aid to Kyiv, but still purchased discounted Russian oil for its own use.

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Finally, the version of Islam Saudi Arabia promotes has also shifted in recent years, becoming more tolerant of both other Muslims and other religions. At home, women can now drive and the religious police have largely disappeared. The sermons preached in Mecca have become less conservative and less anti-Shia, while rabbis and priests are allowed to quietly conduct their own services. Overseas, Saudi missionaries have become less active and less strident while Saudi charities have become much more tightly controlled.

The results of these tactical adjustments have been overwhelmingly positive. Doubting American resolve in deterring Iran’s nuclear ambitions, Riyadh has sought closer ties with Tehran, in a deal that was brokered by Beijing. As a result, the war in Yemen has largely come to an end, thus securing the kingdom’s southern border and freeing up resources for its economic development. The Saudi-Russian energy alliance, meanwhile, has clearly helped elevate oil prices, bolstering the sovereign wealth fund which has eroded the blowback from Jamal Khashoggi’s murder. Saudi relations with Iraq, Qatar, Pakistan, India and Turkey have all also improved, while security and economic relations with Israel have also quietly grown.

Ultimately, though, Riyadh has no intention of abandoning its close relations with the West, which remains the source of most of its military equipment. Just this month, Washington and Riyadh jointly sponsored a conference in Jeddah seeking to end the war in Ukraine. It is increasingly clear, however, that the Saudis are seeking to diversify their security relations. All the signs suggest that Saudi Arabia is following a more independent, Saudi-first foreign policy, one which doesn’t see any qualms with having Russia as a partner on the one hand, and Britain on the other.

Cheney’s involvement appeared to repeat a familiar story about the American military-industrial complex. Four decades earlier, a Halliburton subsidiary, Brown & Root, made large donations to President Lyndon Johnson before securing contracts on a naval construction programme in South Vietnam. Ironically, one of Brown & Root’s critics was a young Donald Rumsfeld, then a Republican Congressman, but in 2003 Bush’s defence secretary and a vocal cheerleader for the war.

Knowing that the oil charge coming from across the Atlantic made it harder for him to win the battle of public opinion in Britain, Tony Blair directly tried to defuse it in a Newsnight interview with Jeremy Paxman:

“Let me just deal with the oil thing because… the oil conspiracy theory is honestly one of the most absurd when you analyse it. The fact is that, if the oil that Iraq has were our concern, I mean we could probably cut a deal with Saddam tomorrow in relation to the oil. It’s not the oil that is the issue — it is the weapons, which is why the UN resolutions have gone over 12 years in relation to the weapons and why we’ve actually allowed Iraq to export oil.”

Yet the Halliburton allegations were a distraction from the actual reasons why Iraq was an oil war — not that Bush and Blair dared present it as such. After post-invasion Iraq descended into civil war, Bush came close to spelling out those motivations when, in his 2006 State of the Union address, he said: “we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world”. In that moment, Bush might have been mistaken for Jimmy Carter. Indeed, since the origins of the oil problem that the Iraq War was conceived to address lie in the Seventies, he was necessarily Carter’s energy heir. Then, the United States became the world’s largest oil importer after decades of near self-sufficiency. Unfortunately from its perspective, it acquired a direct interest in supply from the Middle East just as British imperial power crumbled in the region and post-colonial energy nationalism took hold.

Iraq was always tangled up in Washington’s ensuing geopolitical problems. The Ba’athist government ­— on this issue directed by Saddam Hussein — had nationalised all the foreign oil companies. During the Seventies, Iraq was also an ally of Moscow. Wanting to guard against Soviet influence in the Persian Gulf, but not wanting militarily to replace Britain, the Nixon administration made Saudi Arabia and Iran the guarantors of American energy security in the region. But the Iranian revolution in February 1979, followed by first the Soviet intervention in Afghanistan and then the Iran-Iraq War, overwhelmed this strategy while sending oil prices soaring until new output from Alaska and the North Sea appeared. In this maelstrom, Jimmy Carter made a major strategic change in American foreign policy that has never yet been reversed. Under the Carter Doctrine, the United States became publicly committed to using military force in response to “an attempt by any outside force to gain control of the Persian Gulf”.

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This did not mean that American presidents would necessarily embrace a military approach to American foreign oil dependency in the Middle East. To the contrary, they still much preferred sanctions against hostile regimes and the use of regional proxies, rendering Bush’s 2003 war a radical departure in method. In the Eighties, Iraq became one of those surrogates when the Reagan administration provided support to Saddam’s regime to defeat Iran. But after its territorial ambitions in Iran were vanquished, Iraq again became a problem, even as the Cold War with the Soviet Union ended. In responding to Iraq’s invasion of Kuwait with war, George Bush senior acted on the Carter doctrine. But in deciding to stop in January 1991 at pushing Iraq out of Kuwait, and relying on sanctions on Iraq’s oil exports — policed by the US air force patrolling the Gulf — to contain a Saddam-led Iraq, he bequeathed his successors a strategic contradiction around that doctrine.

Sanctions on Iraq — on top of those in place on Iran and Libya — constrained the supply of oil out of the Persian Gulf, the defence of which was the Carter Doctrine’s whole raison d’etre. While this tension caused few problems in the Nineties, when oil supply was abundant and prices low, in the early 21st century it became an altogether different proposition. Now, output from Alaska and the North Sea was declining, while fears about the rate of depletion at the world’s largest oil field, Ghawar, in Saudi Arabia, were mounting. Meanwhile, China’s accelerating consumption, on the back of much higher growth after Beijing’s accession to the World Trade Organization, constituted a concurrent demand shock.

Undoubtedly, the George W. Bush administration was well versed in oil matters. In his second week in office, Bush set up an Energy Task Force headed by Cheney. The subsequent Cheney Report declared that the United States faced an “energy crisis” arising from the “fundamental imbalance” between the supply and demand for oil. The report concluded by recommending that the administration review the sanction regimes and make moves to reopen the Middle East to foreign energy investment.

Seen in these terms, the Iraq War did possess a strategic logic. Iraq had large, under-utilised oil reserves. Since all Iraq’s major fields are onshore, its production and capital costs are lower than anywhere other than Saudi Arabia and Kuwait; while compared with Venezuela, another historical under-producer, Iraq’s crude is easy to refine. Releasing that potential supply meant both regime change and attracting the international oil majors back into the country. Contrary to Blair’s deflection, there was no prospect of Iraq becoming a top-tier oil producer without technologically modernising the Iraqi oil industry. In the entire period since nationalisation began, Iraq had only once managed a yearly average of more than 3 million barrels per day (bpd) of crude output, while the years of war and sanctions had left the sector’s infrastructure dilapidated. By contrast, Russia’s output in 2003 was 8.5 million bpd and Saudi Arabia’s 10 million.

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The oil rationale for the war appears to have been deemed publicly inadmissible, even as the Cheney Report implicitly had made it clear. In his memoirs, the former chair of the Federal Reserve Alan Greenspan wrote: “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq War is largely about oil.” After facing criticism, he backtracked, claiming that it was a personal remark about why, as a central banker worried about oil prices, he had advocated for military action within decision-making circles. Absent was the brutal language about the gap between public discourse and energy manoeuvrings abroad that ends Sydney Pollack’s 1975 film Three Days of the Condor. There, the covert-operations CIA character explains to the idealistic Robert Redford character why he saw no reason to ask voters whether they supported a plot to seize Middle Eastern oil fields:

“Ask them when they’re running out. Ask them when there’s no heat in their homes and they’re cold. Ask them when their engines stop… You want to know something? They won’t want us to ask them. They’ll just want us to get it for them.”

In Beijing, there were few doubts that the war was oil-motivated. Almost immediately after Saddam fell, the Chinese President, Hu Jintao, signed an agreement with Putin to build China’s first oil pipeline with Russia. For the Chinese leadership, a world in which the United States was willing to wage war for an oil objective was one in which it needed to reassess Chinese oil security a decade after it became an oil importer. This fear crystallised in what Hu identified as the Malacca Dilemma: China’s vulnerability to an American naval blockade in the narrow Malacca Straits, through which all China’s oil imports from the Persian Gulf and Africa pass. If Xi Jinping’s Belt and Road Initiative is a hedge against the Malacca Dilemma, its strategic intent lies in the conclusions an earlier Chinese leader drew about Washington’s response to its own post-self-sufficiency oil predicament.

Yet as an attempt to militarise Washington’s Middle-Eastern oil problem, the Iraq War was also largely a failure. Iraq’s oil production in 2005 was around 20% lower than in the first year of George W. Bush’s presidency. Indeed, it did not surpass that 2001 total until 2010. Although the Iraqi government then boasted that the sector could raise production to 12 million bpd within six to seven years, it has never yet been higher than 4.8 million bpd. As for the return of the Western majors, the Iraqi government took until 2007 to draft a hydrocarbon bill setting out a legal framework for foreign investment, and then could not get the Iraqi parliament to pass the legislation. When, in 2010, it did finally award contracts, it gave access to non-Western firms as well as the majors. Notably, on Iraq’s largest field, Rumaila, the state-owned China National Petroleum Corporation became an equal partner with BP.

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The country’s post-2003 political instability, at times fuelled by anger at the return of the international oil companies, has been nearly entirely un-conducive to those firms trying to transform Iraq’s oil industry. Forced by the Iraqi government to choose between its contracts with the Kurdistan regional government and its operations in southern Iraq, ExxonMobil was left to join forces with the publicly listed arm of China National Petroleum Corporation, PetroChina, on one of the two large West Qurna fields. After Isis seized control of part of Iraq in 2014, attacks on oil infrastructure became common. Even after the American military return to Iraq in 2014 allowed Baghdad to re-establish full territorial control by the end of 2017, Iran’s influence has grown.

In a near-perfect absurdity, considering the Iraq War’s purposes, most of the Western oil companies have, in recent years, either left or reduced their operations, while the Iranian Oil Ministry has set up an office in downtown Baghdad and Chinese firms are ascendant. Indeed, it was in part because PetroChina prevailed over ExxonMobil in their West Qurna partnership that the American major has sold its stake. Eventually, it fell to the American shale boom to make economic restitution for the Iraq War’s failure. Through the 2010s, the world economy relied not so much on oil from the international oil companies in southern Iraq, but that pumped by independent firms in Dakota and Texas: by 2019, US crude production was two-and-a-half times Iraq’s.

But the oil legacy of the Iraq debacle has not gone away. American shale output can no longer grow quickly enough to compensate for the stagnation in production elsewhere. When Joe Biden travelled to Riyadh last summer to meet Mohammed Bin Salman, he was in part asking the Saudi Crown Prince to allow Iraq to supply more oil in an attempt to bring prices down, even as, post-pandemic, Iraq has still not matched its output in August 2019 and the Iraqi government had said it wants oil to cost above $100 per barrel.

For now, Washington is offsetting the affordable supply problem by selling large volumes of oil from the US Strategic Petroleum Reserve. But it cannot do so indefinitely. When it stops, it will again have to address the world’s oil problem without the illusion that it can remake the Middle East by war.

The Western way of life that flowed out of Texas came to take oil for granted. At any time when supply was abundant, few stopped to think about its production. For consumers, oil life was a practically easy life. It was as if, as the Italian novelist Italo Calvino wrote in his short story ‘The Petrol Pump’, energy was “unconditionally and endlessly at your service”. But that notion rested on a colossal illusion given that producing oil took place in a world of destructive chaos. It was no easy thing to extract the sun’s energy from finite organic matter trapped on the seabed for millions of years before there was any form of human life.

Wildcatters like Higgins understood this reality. For them, oil invoked dreads far removed from the chimerical promise of modernity. Since it bent cosmic time, oil could not be trusted. As one witness to a later gusher mused: “Whenever you punch a hole so deep into the ground that oil pops out, Hades come with it. And the more oil, the more Hades.” This equation of oil with Hades contained multiple meanings. At its simplest, it mythically rendered the origins of oil in the underworld of the dead. In blowing away the river that separates the world of the living from the world of the dead, oil accelerated the temporal vanity of all mortal aspiration.

In Pennsylvania and Texas, long-standing rural settlements became fleetingly rich oil towns and then, when the oil fields were depleted, wastelands. Oil encouraged the wildcatters to speculate with borrowed capital against the arbitrary whims of geology and the market power of Standard Oil, inevitably risking their own financial and moral ruin. Since oil wells were highly combustible, drilling for oil also summoned Hades conceived as the Christian inferno of Hell. For many of the wildcatters, to bring Hades into play was to invite the End Times both as the Day of Judgement and the final consummation of the world in fire. To take a verse from Proverbs 27, it constituted a world where: “Hell and destruction are never full; so the eyes are men are never satisfied.”

The wildcatters’ treks westward with this kind of consciousness became part of a potent cultural American imaginary around the temporal instability of oil and its elemental power to poison the earth and corrupt human beings. Three stories told over the course of 20th-century America are particularly revealing: Upton Sinclair’s 1927 novel Oil!, the 1956 film Giant, and CBS’s original Dallas show which began in 1978. Each mediates on oil’s demonic power. Linked as they are by the initials JR for a protagonist, they build on each other to form a saga about the afterlife of Spindletop.

The never-ending search for oil and the risk of fire when it is found constantly always encroaches on the sanctity of the land. In Oil!, wildcatter J. Arnold Ross lies to acquire a goat-ranch on which to drill for oil in a place called Paradise in California. He wants to pass on the oil empire he builds to his son Bunny; at the novel’s end the Paradise wells have gone up in flames. In Giant, the old-moneyed Bick Benedict initially renounces the wealth drilling on his ranch would bring. After he surrenders, he insists, that “all this oil around here hasn’t made a lot of difference. We live pretty much the way we always have.” But he speaks lounging in a new swimming pool and behind him the once pristine terrain has been transformed by hundreds of oil derricks. Dallas, meanwhile, persistently returns to the tension between Ewing Oil, the family business, and Southfork, the cattle ranch where the warring Ewings live. The patriarch, Jock Ewing, owns Ewing Oil. His wife, Miss Ellie, owns Southfork. In one of the show’s finest episodes, a heartbroken Miss Ellie chooses to end her father’s prohibition on drilling for oil on Southfork in order to save Ewing Oil from bankruptcy.

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For individuals to touch oil in these stories is to live in spiritual danger. In Oil! those ranchers offered leases for drilling on their lands find “their frail human nature … subjected to a strain greater than it was made for”. J. Arnold Ross dies in exile in Europe when the real-world Teapot dome scandal — in which President Warren Harding’s Interior Secretary handed out leases on land that had been naval oil reserves to two oil companies for bribes — catches up with him.

In Giant, wildcatter Jett Rink is played by James Dean over the last months of his life with a doomed, unearthly beauty. An oil-saturated Jett declaims after his gusher goes up: “You all thought old Spindletop… was all the oil there was didn’t you. But I’m here to tell you it ain’t. … I’m a rich un.” He becomes the richest man in Texas. But he is last seen fallen to the ground drunk in an empty hall where there was supposed to be a banquet to celebrate the dedication of the Jett Rink airport.

Under the guise of a soap opera, Dallas created the darkest mythology about oil’s ruinous power. All the principal characters live with the demon of Ewing Oil and one way or another they are all destroyed by it. On the surface, there is a duality between two brothers, the elder — JR — who is evil, and the younger — Bobby — who is good. But while Bobby is a much better family man than JR, the closer Bobby gets to oil the more the fraternal polarity falls away. In what was Dallas’s best season, the competition between the brothers for control of the company after Jock’s death simultaneously corrupts Bobby’s character and reveals the ambition behind his righteousness, costing him his marriage.

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Oil ultimately destroys the Ewings as a family and eventually it consumes Ewing Oil itself. The Ewing men go to the brink and pull back only for the cycle to start again more hopelessly. The oil past always has more pull for the Ewings than the oil present. As the show constantly reminds the viewer, Jock Ewing founded Ewing Oil as a wildcatter in the Thirties. When the show starts, Jock is newly retired, and JR is running the company after, as JR once puts it, “the sudden devaluation of the Ewing dollar”: the world where the US must import huge quantities of oil. Jock is glorified as a symbol of a lost past, “the kind of man who made Texas great”. JR is a charismatic anti-hero, constantly improvising as much abroad as at home. JR’s eyes always want more. His ways court disaster for Ewing Oil. But for a while they just as regularly rescue it.

The tide decisively turns against the Ewings in the tenth season, set against the backdrop of the 1986 oil price crash, which devastated the Texas oil industry. JR manoeuvres to blow up Saudi fields to force up prices. When the blowback endangers all the Ewings, Miss Ellie tells her sons that Ewing Oil should have died with their father. Not for the first time, Bobby tries to get out. His wife Pam is proud he has put his “whole house in order”. But oil time has accelerated well beyond Bobby’s belated moral epiphanies. Before Bobby can sell his Ewing Oil shares, the Justice Department announces an investigation into JR’s Middle Eastern ventures. In the ‘Fall of the House of Ewing’, the Justice Department closes down Ewing Oil, and the assets of the once wildcatting company are bought by the show’s fictional oil major, whose CEO has long plotted to bring the Ewings to heel.

This storyline should have served as an endpoint (late Dallas became an unwatchable mess). In symbolic terms, Dallas turned the legacy of Spindletop to dust at the hands of hubris, power, and contingent circumstances in a style recognisable from any Greek tragedy. The fact it was an oil story made for a global audience of energy-unaware oil consumers who scarcely noticed the undercurrents to what they were watching is perhaps its own commentary on western consumers’ relationship to the material basis of their way of life.

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But whatever the force of destruction at work, there is no suggestion in any of these stories of 20th-century Americana that oil can simply be renounced. In Oil! the idealistic Bunny never repudiates his father nor doubts that “this is an oil age”. The novel ends in a cemetery in Paradise. Sinclair allows himself the hope that “men can find some way to chain the black and cruel demon” that “roams the earth”, but he has just described the new derricks that are being built to replace the burnt-out ones.

Dallas goes further, suggesting that JR’s ways are a necessary evil for the age of affluence it portrays. In the show’s final episode, a drunken JR wanders around an empty Southfork. An It’s-a-Wonderful-Life-style figure appears to show him a world where he was not born: Ewing Oil has collapsed a few years after Jock’s retirement, leading Jock to suicide and then Miss Ellie to her grave. Yet this does not redeem JR: in the show’s last scene, JR appears to have turned Jock’s old gun on himself, rendering him the final casualty of all the grief Ewing Oil has caused.

Westerners living lives far removed from the realities of the oil industry are now much more used to the idea of the commodity as a destructive force than those watching Dallas in its prime. Today, climate change and the last decades of geopolitical turbulence around energy have given an urgent charge to the idea that oil is a force from Hades threatening the End Times. Yet Sinclair’s vision of resealing the boundary between Earth and Hades by bringing oil to heel requires sacrifices that many of us living the life oil allows don’t want to contemplate. Indeed, to wish Spindletop away as a wrong turn would be to wish ourselves away: it is the rise of oil as an energy source that has made it possible for there to be so many of us alive in the world today.

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These paradoxes are at work in the American novelist Cormac McCarthy’s work. In his masterpiece Blood Meridian — published in 1985 — McCarthy told a story about scalp hunting across the Texas-Mexico border in the mid-19th century, making Texas a site of cyclical cosmic time. The first wildcatters easily fit into McCarthy’s mythology. Indeed, one could perhaps read the novel’s epilogue, where a man is “progressing over the plains” making holes in the ground “striking the fire out of the rock which God has put there”, as the start of a wildcatting quest.

But in his post-apocalyptic novel The Road­ — published in 2006 — cyclical time has ended: everything is sinking into oblivion. The cause of the ecological cataclysm is unspecified. But a story of oil in its last twilight is palpable. In the opening, a father awakens from a dream where he and his son have been lost in the depths of a cave until they reach “a black and ancient lake”. On their journey south, the man and the boy use an “oil company roadmap” as a guide. The man has them search for gasoline to light their lamp. At one early stop, they first find “the odour of gas only a rumour” and then, desperate, return to decanter dregs from plastic oil bottles. Later, what they find is “years old. But it was gasoline and it would burn”. It is their oil-lit lamp that allows them to discover the largest store of food they encounter.

In The Road, it is as if all oil time is compressed from oil’s origins to its first use to its necessity to its reconstruction of the American landscape to its depletion and ecological hazard. Before his demise, the man sees the boy “looking back at him from some unimaginable future”. That place appears to be an oilless world. During the man’s last night, the light comes not from the lamp but a candle borne by the boy. To the man, “old dreams encroached upon the waking world”. With his death, oil and its stories might be said to pass into the silence “of things ceasing to be”.

In the last paragraph, the authorial voice changes. We are transported to an organically alive world. Here, the maps are the “patterns” on the back of trout swimming in mountain streams, and they are “maps of the world in its becoming”. But something old still has its purchase. The patterns are also “Maps and Mazes. Of a thing which could not be put back. Not be made right again”. It’s an ending that appears unwilling to privilege either optimism or pessimism: an ending perhaps from a place where the cosmic stakes of the age of oil can’t quite be contemplated.

This is, as Thomas Schelling wrote, “a conscious process of dirty bargaining”, whereby each side tries to inflict pain and suffering on the other side until one or both yield. Put simply, the West and Russia are playing a violent version of the schoolyard game Mercy. The centrepiece of the West’s effort to inflict pain on Russia is what the historian Nicholas Mulder has called “the economic weapon”, which has been deployed at unprecedented scale. The centrepiece of Russia’s effort to inflict pain on the West is the commodities weapon. In this competition in pain-tolerance, it is not immediate whether the West or Russia has the upper hand.

The West unleashed the economic weapon with considerable fanfare. Russia, with a GDP smaller than South Korea, was treated not as a great power adversary but as a rogue stake akin to Iran — a nuisance that could be rather effortlessly strangled through the unrestrained use of Western sanctions. Great hope was placed on the idea that these sanctions would inflict such catastrophic pain on Russia as to undermine the Putin regime.

These hopes and expectations were based on wishful thinking. Non-Western powers — China, India, Brazil, Mexico and South Africa — simply refused to play along with the West. They appeared more worried by the West’s weaponisation of the dollar system than by Russian aggression against Ukraine. Even more importantly, Western leaders were gravely mistaken in their idea that Russia was a second-rate power that could be simply crushed with the economic weapon.

This idea was inconsistent with any clear-eyed evaluation of the facts. The Red Army was the strongest land army in the world from the mid-Thirties to the late-Eighties, and by the early 2000s, Putin had revived the Russian army following a brief period of disinvestment and neglect. The Russian army has seen action in a series of small wars since Putin came to power, demonstrating operational and tactical competence.

Thanks to its nuclear arsenal, Russia has enjoyed strategic parity with the United States since the late Seventies, which has allowed it to deter more direct US intervention in the Ukraine war. President Biden has wisely ruled out sending US combat forces to directly engage Russian forces. And despite a botched invasion plan, the baseline scenario for the Ukraine war remains an outright Russian victory. If that happens, the Ukraine war will look in retrospect very much like the Winter War of 1939-1940, in which, despite many early reversals and heavy losses inflicted by the Finns, the Soviet steamroller ultimately prevailed through sheer material superiority.

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Russian GDP may be small, but Russia is, together with the United States, one of the only two states in the international system that can survive relatively unscathed in complete autarchy. Indeed, Russia is not dependent on the world for hard-to-replace stuff — the world is dependent on Russia. It supplies a significant fraction of the world’s energy, metals, fertilisers, and food.

The upshot is that the West’s economic war on Russia is generating tremendous blowback in the form of sky-high commodities prices and the mother of all inflationary shocks to the world economy. Just like imposing an economic blockade on Saudi Arabia is a recipe for self-harm, trying to economically strangulate Russia is a fool’s errand. The breakdown of Russo-Western relations has generated a food crisis, an energy crisis, and a broad-based inflationary shock the likes of which we haven’t seen since the oil price shocks of the Seventies. So, the Russo-Western confrontation is extremely costly for the world at large. Meanwhile, Russia’s coffers are overflowing from commodities exports. So much for the economic weapon.

It is not just that imposing costs on Russia is very costly to the West and the rest of the world. With Western opinion leaders fantasising about Russia after Putin, it pays to be clear-eyed about regime stability on both sides. Russia is what Jeffrey Winters calls a “Sultanistic oligarchy” — a political economy characterised, above all, by the need to temper conflict between oligarchs through the concentration of power in the hands of one man. China is also a Sultanistic oligarchy. The difference between Russia and China is that, while Putin faces a small and stable number of oligarchs, China’s oligarchy is constantly growing in size, wealth, and power. The stability of the Russian oligarchy endows the Putin regime with considerable stamina. No serious Russian analyst believes it to be at risk of collapse, no matter what the West dishes out.

The contrast with the West couldn’t be starker. The Biden administration and the Democrats look set to crash and burn on the shoals of inflation. The president’s approval rating has sunk below 40%. Democrats will almost surely lose control of Congress come November. Of course, other issues condition Democrat fortunes. But it can hardly be denied that the greatest threat to the Democrats is inflation. And inflation is at least partly under Putin’s control — he can turn the knob up and down to maximise the delivery of pain to the West.

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Putin's plan to starve the world

By David Patrikarakos

In fact, considerably more than the Democrat’s performance in November is at stake. Biden’s wager on Ukraine is running the risk that the Democrats could be locked out of power for the rest of the decade. That would, among other things, put the US energy transition at risk. No doubt Putin will do all he can to replace Biden with Trump. He may very well succeed. Instead of the West engineering a regime change in Russia, it is Russia that is likely to succeed in engineering a regime change in the United States. Is there any way to avoid this nightmare scenario?

Again, we must be clear-eyed: the source of the problem is Western misperception of Russian weakness. American Russia policy is based on the assumption that Russia is weak and the West strong. But, as we’ve seen, this assumption is unwarranted. In terms of what we can dish out to him and what he can dish out to us, it is Putin who has the upper hand.

The United States, and the West more generally, have committed to supporting Ukraine as it fights for its existence against Russia. It is not politically possible for Washington to throw the Ukrainians under the bus, even if doing so made sense from the perspective of cold-hearted realism.

Washington is gearing up for a protracted struggle intended to bleed Russia through proxy war in Ukraine and with the liberal use of the economic weapon. This policy is premised on the idea that time is on the West’s side. This assumption, like the assumption of Russian weakness, is wrong. If Putin has the upper hand in the competition in pain-tolerance, then time is on his side. With his current policy, Biden is running a significant risk that the US, instead of Russia, will be destabilised politically. The correlation of forces calls for a different foreign policy. What might that look like?

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Wheat has corrupted humanity

By John Lewis-Stempel

The Ukrainian struggle has won the hearts and minds of the West. But Ukrainian interests are not necessarily congruent with American or Western interests. Moreover, as paymasters, armorers and tactical intelligence providers, the Americans enjoy considerable leverage over the Ukrainians. A hard-nosed policy would use this leverage to get the Ukrainians to the bargaining table sooner rather than later, and possibly much sooner than the Ukrainians would prefer.

A Western peace policy would seek to, first of all, get the warring parties to begin negotiating as soon as possible. Second, it would clearly set out what the US seeks from a negotiated diplomatic settlement. At a minimum, it should seek a Ukraine free from Russian coercion and free to seek non-military relations with the West. Third, the West must concede that Ukraine will never be part of the Western military alliance. Indeed, the point of departure for productive diplomacy is Ukrainian neutrality. The details should be left to the two warring parties.

Credibly backed by the West, the Ukrainians will not necessarily have the weaker hand in their negotiations with the Russians. The West has demonstrated that it can impose large costs on the Russians. But the Russians have also demonstrated their capacity to inflict pain on the West. With these demonstrations, the door is now open for a diplomatic resolution of the Ukraine war. The United States will find that there is considerable support at home and abroad for a principled peace policy that does right by the Ukrainians without destroying Western political economy in the process.

The conventional inflation narratives are both flawed, however, and are increasingly deployed to cover a retreat to the comfort of traditional ideological divides. Summers and Furman, for example, are aggressively pushing to eliminate tariffs to counter inflation, even though Trump’s 2018 tariffs cannot account for accelerating inflation in 2021, and their repeal would offer at best small and temporary relief. Likewise, Democratic rhetoric against “corporate greed” and “price gouging” mostly takes the form of moralistic posturing and only obscures more serious concerns about industry concentration and lack of competition.

Moreover, each side’s preferred explanations for inflation seem at odds with their perceptions of its severity and staying power. If, on the one hand, a one-time spending bill is the main culprit, then the Fed should easily be able to manage inflation through interest rate hikes (already underway), and there is little reason to fear an out-of-control inflationary spiral. In an April 2021 interview, Summers argued that a one-off stimulus would alter long-term expectations and lead to persistent inflation because it signaled the advent of  “a new era in progressive policy”. But a year later, any such progressive paradigm seems dead and buried, and unless Democrats pull off a miracle in the midterms, it is likely off the table through at least 2024.

On the other hand, if “corporate greed” — read charitably as underlying structural problems in the economy — is the main driver of inflation, then it seems unlikely that the Fed will be able to contain it, except perhaps at the cost of a severe recession. If that is the case, then any future progressive fiscal expansion would have to be ruled out, given its devastating inflationary consequences, unless those problems are addressed.

Indeed, the question going forward is whether there are structural issues — aside from idiosyncratic supply chain problems — that will cause inflation to remain elevated and lead to stagflation (high inflation and low growth). Here, there are reasons for concern, although they do not fit neatly into either conventional narrative and so have received relatively little attention.

The most intriguing and potentially alarming trends are visible in the oil market. In December 2019, before Covid, global oil consumption was about 100 million barrels per day, and the price of West Texas Intermediate (WTI) crude hovered around $50-$60 per barrel. At that time, the US operating rig count was around 800 (around 2,000 globally), according to Baker Hughes. After the pandemic hit, in 2020, global oil demand fell to about 90 million barrels per day, prices collapsed and briefly went negative, and the US rig count hit a low of around 250. Oil demand recovered about half the lost ground in 2021 and is expected to return to 2019 levels of 100 million barrels per day this year. In December of 2021, WTI spot prices were around $75, rose significantly after the Russian invasion of Ukraine, and currently sit around $110. Yet the US rig count is still around 700 (of 1,600 globally). The last time oil prices were above $100, before the crash of 2014, the rig count was over 1,800 (3,600 globally).

This trajectory is difficult to square with inflation accounts based on excessive demand. Oil demand has still not exceeded pre-pandemic levels; it is supply that has lagged. Meanwhile, far from being “too greedy”, companies seem to not be greedy enough — at least in the conventional sense of maximising profits. Instead of reinvesting their earnings in drilling new wells, even at profitable oil prices, companies have returned cash to shareholders.

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Neoliberalism died before Ukraine

By Gary Gerstle

Some have argued that oil companies are not drilling because of the Biden administration’s environmental regulations. As a critic of those policies, I am sympathetic, but they cannot account for the larger phenomenon, including international drilling. Others have suggested that ESG investing requirements have prevented the oil and gas industry from accessing capital. While there is no question that ESG as presently constructed is a disaster, this does not explain why companies are not reinvesting their own earnings. There are some time-lag issues — wells cannot be drilled overnight — but prices have now been elevated for months. Oil futures are also over $80 through most of 2024, meaning companies can hedge future production.

The best explanation is, therefore, the simplest one: shareholders prefer that companies return cash rather than invest, a preference widely discussed among industry participants and observers. Oil companies, to quote Bloomberg’s reporting on this issue, have “responded to investors’ persistent insistence that they return cash to shareholders and not spend their cash flow on capex. . . . That means that we have under-invested in oil, which helps to lead to a higher oil price, but it also means that those companies do have much more free cash flow.”

Any serious analysis of today’s inflation must recognise the different dynamics at play across various sectors. The oil industry is not the same as the housing market, semiconductors, shipping, and so forth. Nevertheless, across industries, the trend of shareholders preferring cash returns over investment has been prevalent in recent decades. Corporate share buybacks, which dropped from previous highs during the pandemic, returned to record pace in 2021 and 2022, according to Goldman Sachs.

The oil industry is actually a late adopter of this cash-return model. Previously, exploration and production companies were typically managed to maximise their “net asset value”. This meant that, in the American shale boom of the early 2010s, companies were investing in drilling at levels far above their operating cash flow, using debt financing to fill the gap. After the crash of 2014, however, Wall Street gained additional influence over the sector. Ever since, the industry has maintained “capital discipline” and avoided negative cash flows.

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The West can learn from China

By Marshall Auerback

Economic theory assumes that companies are managed to maximise individual firm profits and, therefore, that they will invest to expand operations as long as expected returns exceed the cost of capital, and that they will compete with each other until profit margins approach zero. But economic theory has refused to grapple with the fact that maximising shareholder returns is not identical to maximising firm profits.

Financial market incentives may discourage competitive investment in favour of shareholder returns, as seen in the oil industry; indeed, the gap between firm hurdle rates and cost of capital is a distinguishing feature of recent economic history. In short, what economic theory presumes to be “rational” for a single firm may not be “rational” from the perspective of a diversified institutional portfolio manager. If anyone is too “greedy”, in other words, it is not corporations but shareholders. Or, more precisely, the incentives of financial managers may not be consistent with maximising overall output. This trend has led to an erosion of productive capacity and supply buffers, which has become painfully evident in recent years.

The same forces also encourage industry concentration through mergers and private equity “roll-ups” to preserve pricing power, as well as the separation of high-value intellectual property rents from capital and labour costs. The result is a bifurcated economy with high-margin “superstar” firms on one side and low-profit “commoditised” firms on the other. In an inflationary environment, this means that firms with large profit cushions, like superstar firms built on intellectual property rents, probably have the pricing power to maintain high margins. Firms without pricing power, like small-business restaurant franchisees, often have no profit cushions and must raise prices out of necessity.

Fears of stagflation have focused on a Seventies-style wage-price spiral, but the above considerations suggest that a greater concern today may be the threat of a “profit-price” spiral. In the Seventies, investment was discouraged by high taxes, strong unions (which directed profits to labour), and relatively robust antitrust enforcement. With low investment, increasing demand only led to more inflation rather than growth.

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The cost of liberal economics

By Mary Harrington

Today, we have low taxes, weak unions (although tight labour markets), and high industry concentration. These conditions, combined with shifts in corporate governance and financial management, have also discouraged investment — by facilitating extractive financial engineering, as in the case of the oil industry example. A scenario in which companies maintain returns in a stagnant economy by preserving margins while avoiding competitive investment is also more consistent with recent empirical findings. Corporate profit margins achieved a record in 2021 (though they seem poised to retreat somewhat in the coming quarters), and studies have found that rising corporate profits have contributed significantly more to inflation than labour costs. Employees may be able to manage some concessions in a tight labour market, but the data hardly suggest that is the dominant factor.

This sort of firm behaviour has a telling precedent: the modern tobacco industry. Since cigarette consumption began dropping in the Eighties, the basic model of tobacco companies has been to offset sales volume declines with price increases. This strategy works because tobacco companies face little competition due to industry concentration and regulations prohibiting advertising. Thus cigarette price inflation has averaged about 7% per year since 1997, while overall inflation during that time has been slightly above 2%.

The example is revealing because tobacco companies’ high cash returns and low capex requirements have historically made them attractive to financial investors, despite modest growth or innovation. Because of its dividend, Philip Morris was the highest performing stock of the 20th century, beating out far more technologically significant rivals. Guided by the incentives of financial markets, it would not be especially surprising to see more industries adopt the “stagflationary” behaviours of Big Tobacco.

To the extent that is the case, monetary policy alone will not be sufficient to heal the economy. Low rates since the financial crisis have supported asset bubbles but not high investment. Nor will demand-side policies work. As the last several months have shown, further stimulus payments are likely to allow companies to take profits without supporting sufficient investment or wage growth.

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Do we need a capitalist civil war?

By Joel Kotkin

Given the immediate-term salience of monetary policy debates, it is often forgotten that escaping the stagflation of the Seventies required not only a sharp rise in interest rates but also the “supply-side” reforms of Ronald Reagan. In this respect, an overlooked element of Summers’s critique of the Biden stimulus bill — that it was not simply too large but too weighted toward transfer payments — is especially apt, as is his call for “a kind of progressive supply side economics that emphasizes . . . public investment.”

Conventional supply-side policies like tax cuts, typically associated with Republicans, fall prey to the same financial dynamics described above, and have led primarily to increased shareholder returns and asset bubbles rather than increased investment in recent years. New supply-side approaches are required, such as the proposed funding for manufacturing investment contemplated in the COMPETES/USICA conference bill. The administration has also proposed other supply-side measures in areas such as housing, but previous efforts along these lines were weighed down by unpopular progressive wish-list items. Rumours that the administration is considering a cancellation of some student debt — with no accompanying reforms to higher education policy — suggest progressives still remain trapped in old welfarist paradigms.

Contrary to neoliberal disdain for tariffs and “hipster antitrust”, however, prudent competition and trade policy reforms will be necessary to boost domestic investment in a highly concentrated economy whose industrial base has eroded. And although progressive proposals for a windfall tax on profits would do nothing to solve supply-side problems, a tax on “windfall buybacks” may make corporate earnings reinvestment more attractive.

Even if inflation subsides more rapidly than expected, a new policy focus on the supply side is necessary. Avoiding stagflation simply by returning to “secular stagnation”, as Summers would put it, would only lead to further decline and likely a repetition of the same cycle in the future. Also required is the recognition that fundamental assumptions of economic theory — and the ideological approaches they inspire — no longer match the realities of America’s financialised economy.

Russia is the world’s second biggest exporter — supplying nearly five million of the 100 million barrels of crude oil the world consumes every day. More than half of those exports flow westwards into Europe, through pipelines that cross Ukraine and Belarus. It’s difficult know which is the grimmest scenario: that the oil stops flowing due to sanctions or sabotage; or that the trade continues — filling the Kremlin’s coffers while Russian bombs rain down on Kyiv.

Markets are responding to the heightened risk in the usual manner, which could cost us dear. Oil shocks have a nasty habit of crashing economies — causing chaos far beyond the garage forecourt.

In July 2008, oil prices surged to a record high of $147 barrel. The knock-on effects were catastrophic. The ruinous cost of commuting undermined confidence in car-dependent housing developments, which crashed the sub-prime mortgage market and triggered the Global Financial Crisis. Meanwhile, the Russians took the opportunity to invade a neighbour — in this case, Georgia.

The oil shocks of the Seventies plunged the West into a decade-long retreat and the impact wasn’t just economic. A fragilised America was routed by the communists in Vietnam and traumatised by the ayatollahs in Iran. Meanwhile, the Russians took the opportunity to invade a neighbour — in this case, Afghanistan.

The Suez Crisis of 1956 was also soaked in oil. At the time, 70% of Western Europe’s oil supplies were imported via the Suez Canal. So when it was nationalised by the government of Gamal Abdul Nasser, panic ensued. Against American wishes, the British and French tried to seize back control of the vital artery. This prompted a furious President Eisenhower to punish his disobedient allies — by using the oil weapon. The Americans refused to release emergency supplies from their reserves, thus forcing the British to backdown — followed by France (and Israel). Meanwhile, the Russians took the opportunity to invade a neighbour — in this case, Hungary. 

As Helen Thompson explains in her excellent new book Disorder, this was not the end of the matter: “Too often seen primarily as a story about post-war British power, the Suez crisis shattered the idea that the United States would always act as an oil supplier of last resort to its allies.” The loss of trust would have lasting consequences.

A humiliated France joined with West Germany to deepen their partnership — and lay the foundations of the European Union. Thompson quotes Konrad Adenauer’s words to the French Prime Minister: “Europe will be your revenge.” Another fateful outcome was that Western Europe did a deal with Khrushchev to gain access to Soviet oil production. Pipelines were built from East to West, re-establishing Russia as a major energy exporting power. Which brings us back to today.

The nations of the West will either hang together or hang separately. In respect to energy supplies, that means putting the trans-Atlantic relationship before domestic popularity. For instance, the Biden administration could easily pander to the American electorate by restricting exports of oil and gas. US consumers would probably benefit — but only at the cost of weakening European resolve in the face of Russian aggression. Indeed, without help from their allies, the most vulnerable countries — especially those bordering Ukraine — will be left wide open to Putin’s energy blackmail. 

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Putin's next move

By Aris Roussinos

Europeans must make sacrifices too. In particular, the Germans need to atone for the special part they’ve played in undermining Europe’s energy security. As well as permanently scrapping the Nord Stream 2 gas pipeline, Berlin must revisit the insane decision to shutdown the country’s nuclear power stations. If it’s possible to restart the reactors, then that would send the clearest of signals that Europe will do what it takes to stand strong.

It’s important that we distinguish between short-term and long-term imperatives. In the short-term, we need to secure alternative supplies of oil and gas as a matter of urgency. If that means cosying-up to Saudi Arabia, then so be it. The same goes for Iran — negotiations to reach a new deal with the Tehran government were already underway before the Ukraine crisis and should be accelerated.

Meanwhile, back home, we shouldn’t be shy about squeezing a few more drops of oil and gas from the North Sea. It pains me to say it, but this is an issue on which my fellow greens need to shut-up. Yesterday, in what may be the worst-timed letter in history, the the Climate Change Committee wrote to the British government to oppose new North Sea production. Obviously, the Committee’s main concern is climate change, but we’re not talking about using more fossil fuels — we’re taking about reducing what we buy from Putin. 

In any case, there’s a huge green prize to be won here. In the longer-term, the environmental agenda is perfectly aligned with the security agenda. 

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Putin's spiritual destiny

By Giles Fraser

Over the last few months we’ve learned the hard way that depending on fossil fuels is a threat to our prosperity — and to our sovereignty. If we want to free ourselves from the destabilising effects of volatile energy prices and to snatch the oil weapon from the hands of our enemies, then we must free ourselves from fossil fuels altogether. That can’t be achieved overnight — hence the need for stop-gap measures — but it can be achieved within a generation. 

Fundamental change is coming, the only question is how fast. So far, policy has been driven by climate change objectives, which operate on a timetable stretching into the second half of the 21st century. But the security agenda doesn’t allow us to wait that long. This isn’t about saving the planet, it’s about saving ourselves from the oil tyrants.

Now, though, many of the opinions that were held by the Left-leaning devotees of mung beans and carob in my youth have become the preserve of the Right — and especially of its weirder online subcultures. Here, enthusiasm for raw milk and animal protein (especially, for some reason, raw eggs) join an aversion to touching shop receipts and views such as “feminism has harmed men and is actively anti-civilisation” and “democracy is fake“, as well as a range of even more pungent anti-progressive talking-points.

Perhaps the two food chain talking-points that recur most frequently and vehemently, though, are hostility to soy (which has become a metonym for emasculation due to its rumoured feminising content) and to “seed oils” such as canola, palm and sunflower oils.

And when a new California startup announced this week that it’s taking aim at environmentally destructive vegetable oils, it received disgusted pushback from Right-wing health-freaks. Zero Acre Farms, with backers including the Branson family and Hollywood actor Robert Downey Jr, said yesterday that it’s raised $37m to launch a new, “healthier” substitute for vegetable oil, made “by fermentation”.

It was launched with a rallying call to the seed oil haters. It didn’t go down well: biotech industrial complex wants to destroy farming and sell you synthetic garbage! It’s a familiar refrain to me, having grown up around eaters of health food. But unlike in my childhood, today this line of argument no longer comes from the Left.

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By Mary Harrington

This reaction, and the broader political realignment on health food, both make more sense when you dig into the business of fat: who makes and sells it, who eats it — and who gains or loses.

Until the industrial era, human-edible fats were mostly obtained from dairy products or rendered meat. The dawn of science and large-scale manufacturing, though, inspired innovators to seek new sources of oil — and new ways to use industrial byproducts. In the process, mechanical methods were invented for extracting palatable vegetable oils, especially from seeds.

In turn, a new ecosystem of scientific research and marketing sprang up to promote the benefits of these new, industrially-produced ingredients. “Tonight’s the night Mrs Ed Flynn starts Polyunsaturating her husband”, declares a mid-Fifties advert for Mazola corn oil in National Geographic. According to this advert, “medical authorities” advise replacing “solid fats” — by which is meant lard and dripping — with “more highly polyunsaturated vegetable oils”, which scientific authorities now declared to be healthier and more beneficial.

I’ve seen the manufacturing of “medical authorities” from the inside. Of all the many jobs I’ve held, in the course of my extremely chequered employment history, hands down the most unpleasant was a brief stint as marketing executive at a small PR outfit that specialised in “nutraceuticals”. That is, chemically-derived additives for the junk-food industry.

The company’s work proceeded roughly as follows: on behalf of nutraceutical manufacturers, it would arrange for scientists to produce “studies” showing that the chemical in question had health benefits, or didn’t cause the harm it was being accused of. Then hapless 20-somethings (me in this case) would try and persuade journalists to write enthusiastic articles about this newly laundered “science”.

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By Tom Chivers

Such hapless 20-somethings would also be in charge of responding to angry letters, written in all caps, from consumers suspicious that they were being lied to. Which they weren’t. At least, not exactly. And yet what they were being fed had the same relationship to truth as aspartame does to sugar. The work felt profoundly cynical. I didn’t last long.

What I learned from that brief, inglorious experience was that the tinfoil hatters are, to an extent, right. Big Business really does use scientific discourse to launder the reputation of deeply questionable food additives, in the name of profit. And this was once a standard talking-point for Left-wing junk-food haters.

The rant would segue from grumbling about “processed food” being unhealthy, to a broader attack on the immense, well-funded commercial infrastructure dedicated to pushing high-fat, low-nutrition products into the nation’s shopping trolleys. In other words: the evils of junk food stand for the evils of Big Business, and a scientific establishment seemingly in hock to its commercial interests. In practice, the critique of processed foods is a profoundly anti-capitalist, anti-technology one. But now, the modern Left has expelled anti-capitalist, anti-technology voices entirely, instead embracing science, technology and Big Business as key delivery partners for its vision of utopia.

This has been a long time coming. Back in the mung bean days, the Anglophone Left was still the historic, improbable blend of well-meaning bourgeois idealists and the industrial working class. But as de-industrialisation shrunk and dispossessed that industrial base, the bourgeois half of the coalition grew dominant: a process commentators have for a decade now condemned as “the gentrification of the Left“.

People in glass houses are famously advised not to throw stones. And as the progressive worldview has become more monolithically elite in class terms, it’s also lost its antagonism to Big Business. Perhaps the hinge decade for this was the Blair era, when “social enterprise” emerged as a policy watchword and everyone sincerely believed that business could and should be a force for good. And in the grisly aftermath the 2008 Great Crash, the radical, anti-capitalist Left of yore both enjoyed its last hurrah and suffered utter defeat.

Far from helping to hold Big Finance to account, progressive ideology instead served to kill the anti-capitalist Left as a political force. The Occupy movement famously found itself paralysed by woke purity spirals: its participants spent so much time arguing about identity they never coordinated any kind of effective political action.

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What vegan propaganda ignores

By John Lewis-Stempel

With anti-capitalism now effectively neutered, wokeness has been domesticated as the house ideology for a new, socially-conscious capitalism — the kind that today receives full-throated endorsement in the Financial Times. Unsurprising, then, that the food industry is falling enthusiastically on new ways to dress the marketing of ultra-processed foods in the garb of scientifically-endorsed health — which now gives it a progressive sheen. The populist twentieth-century junk-food marketing message of healthy, affordable abundance has given way to an anxious twenty-first-century one of health, environmentalism and moral purity.

Consider “Veganuary“: a kind of secular Lent founded in 2014, that encourages people to eschew animal-origin foodstuffs in favour of a “plant-based” diet, in the name of saving the planet. This festival is enthusiastically promoted by retailers of “plant-based” foodstuffs, a market predicted to see explosive growth by 2030. Whether “mycoprotein” (aka fungus grown in vats) or synthetic “meat” made from soya, such products frequently contain large volumes of just the industrially-produced oils once heavily criticised by Left-wing opponents of junk food. So “Veganuary” is, in truth, a month-long PR festival for the ultra-processed food industry, complete with articles citing scientific studies that underline the health benefits of this way of eating.

Who can tell how many such studies are “sold in” by hapless 20-somethings miserably employed in food PR firms? Certainly the progressive emphasis rarely seems to be on cooking from scratch. That’s the preserve of dissident mutterers, expelled from polite discourse to fulminate out in the badlands about Big Business, Big Pharma, fake science and the perils of junk food. As one response to Zero Acre put it: “you want us cooking our fake vat-grown “meat” in fake microbe-extruded oil product in a pod somewhere”.

“Health” subcultures are increasingly Right-inflected, because what’s left of the resistance to industrial capitalism is also Right-inflected. But will the new defenders of natural food against the ravages of technocapital give up to commerce, like their progressive predecessors? Perhaps in another decade, this backlash will have been assimilated and regurgitated as Based Gainz Ready Meals. Let’s hope the new anti-capitalists are nimbler in avoiding this fate than their mung bean-eating forebears.

I have met men who still long for their wives, when the separation has been longer than the marriage. I have met old Bolsheviks who kept rehearsing Trotsky’s actions after Stalin’s death, believing the Soviet Union would still be with us, and thriving if only he had returned two days earlier to Moscow. I have even met New Labour believers who think that if David Miliband had defeated his brother, then Brexit would never have happened and Labour would be in power, at the vanguard of a renewed EU.

When I listen to such claims, an old Yiddish phrase comes to mind, which is translated as: “If Grandma had wheels she’d be a trolly”. The conversation always ends in a kind of faraway silence. I find it hard to know what to say, while the person thinks about what to do next; whether to send a birthday card, write a letter to the Morning Star, renew their efforts to support Keir Starmer.

Sometimes the ship has sailed and it is never coming back to port. It has a new crew and a new cargo, a new trading route and a new flag. Yet they still believe that, someday, their ship will return; they stand at the dock, staring out to sea but always walk back home alone.

Sometimes things change, an era changes, and there is no going back. For institutions, for nations, as well as for people, this is hard to accept. For Britain and the United States, the Iranian Revolution is such a phenomenon. It was all going so well, and it is hard to accept that it will never go well again.

Muhammad Ali said that the first rule of boxing is that you never get knocked out by a punch you see coming. It is also the first rule of politics. And no-one predicted the form of the the Iranian Revolution in 1979.

Both London and Washington did predict an imminent threat to the rule of the Shah, but from the Left, through a coalition between disaffected workers and intellectuals supported by the Soviet Union and led, within Iran, by the Tudeh Party. That is not what happened.

The spectre of Mohammad Mossadegh and the 1953 coup, orchestrated by the CIA operative Kermit Roosevelt, held them in its thrall. Mossadegh was an aristocratic liberal nationalist who wanted to nationalise Iranian oil. At the time, the Anglo-Iranian Oil Company, the predecessor of BP, held a monopoly of oil production in Iran and signed a deal which only gave 19% to Iranians. It was effectively a nationalised industry and the profits were vital to post-war reconstruction. The NHS was founded on the assumption of continued revenue streams from Iran.

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All hail Good King Boris

By Maurice Glasman

The Labour Government of 1945 was extremely opposed to to Iranian nationalisation, while pursuing it vigorously at home. Colonial double standards. Ernest Bevin, Herbert Morrison and Clement Attlee all took a hostile view of Mossadegh and supported the Shah as the instrument of maintaining the status quo. Eisenhower agreed and Kermit and his muppet show was unleashed; Mossadegh was deposed and condemned to a life of internal exile.

That is the lost moment of Iranian history, the great “what if?” What if we had supported Mossadegh rather than depose him? What if Iran had grown into a liberal democracy?

This is the question that haunts the minds of our diplomats because what happened was completely different: an Iranian Revolution led by Ayatollah Khomeini and the imposition of an eternal form of clerical domination, “the rule of the jurists” — and there’s no way out.

The coming Iranian presidential elections on Friday indicate and express the doomed eternity of stasis that the revolution created. The inevitable winner will be Ebrahim Raisi, a mass-murdering apparatchik who was part of the four-man team responsible for the public executions of up to 30,000 Leftists in a few months in 1988 for the crimes of atheism and apostasy.

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Roger Scruton still gives me strength

By Maurice Glasman

He will be elected on a turnout of less than 30%. Most Iranians understand that the power lies not with the President, but in the office of the Supreme Leader, Ayatollah Khamenei, which controls the Revolutionary Guard, the media channels, the clerics and foreign policy.

In other words, there is a double system. These elections are for a government that will pretend to govern while the real power lies elsewhere. Just look at the country’s vaccine programme, which has inoculated only 2% of the population. The Health Ministry fully participated in Covax to receive vaccines, and yet Khamenei announced a ban on both British and American jabs on the grounds that they were “likely designed to contaminate foreign nations”, leaving the Chinese vaccine and Sputnik as the only options. One is useless and the other is scarce.

The office of the Supreme Leader also vets who can stand for office, and they rejected all candidates from outside the revolutionary vanguard. The former reforming President, Mohammad Khatami, set up an “Association of Combatant Clerics” and put forward fourteen candidates, but each was rejected.

Iranian foreign policy is based on building proxies, Hezbollah in Lebanon, the militias in Iraq, Hamas in Palestine, the Houthis in Yemen. And it’s the same at home. These elections are just proxy politics, the candidates represent the regime, not the people.

I sat through the first three-hour debate between the approved candidates. They were not allowed to discuss Covid, vaccines, sanctions, power cuts, sinking ships or burning factories. It reminded me of Brezhnev-era Soviet plenaries, where all the candidates agreed that the achievements of the Revolution were eternal, but the enemies of socialism were still sabotaging the project, particularly the Government.

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By David Patrikarakos

This time, it’s the unprecedented form of Shia theocracy invented by Khomeini that must be preserved. When I was in Najaf in 2018, the historic home of Shia religious authority, I met with two senior ayatollahs and many clerics, all of whom rejected the Iranian system as hostile to the teaching and practices of the Shia Muslim faith. In Iraq, a year later, I witnessed the assassinations of protestors by Iranian-backed militias. Tens of thousands of Shia protestors in Baghdad sang “Iran Iran, go away” every night. They are still there; still shooting them.

At that time in November 2019 demonstrations against the regime exploded all over Iran, so the Government turned off the internet and shot the protestors. Any remaining political prisoners were recently transferred to the violent offenders section of the prison. They won’t last long.

And yet Western diplomats still believe that it is possible to negotiate with the government, to normalise relationships, to go back to 1953 and do the right thing this time. The first foreign policy act of the Biden Presidency was to re-engage with Iran and revive the Joint Comprehensive Plan of Action, lifting sanctions on proxies and renewing the distinction between hardliners and “moderates”. This is not a distinction that is believed in by the Iranian people as reflected in the overwhelming majority who will boycott the election. The Biden approach still assumes that they are negotiating with Mossadegh when the truth is otherwise.

The Iranian Left have been utterly routed and the middle class lurk in North Tehran, playing cat and mouse with the Committee for the Promotion of Virtue and Prevention of Vice, over how much hair women can show in public. And yet the yearning of Iranians for something better and different cannot be stilled. It remains a crime in Iran to speak to others about Jesus or to claim that you have a relationship with him. And yet, the number of Christians there is now estimated to be close to a million.

There is a network of underground churches. Bibles are smuggled in and passed from hand to hand. The numbers continue to grow. It seems that for thousands of Iranians the only way to get rid of this regime is to change your religion. That is the long story in Iran. The desert church is lighting its candles for the prince of light once more.

It’s a phrase you’ll hear from Muscovites and unreconstructed provincials alike. It echoes from the Baltic to the Pacific, and in every grey town and concreted city in between. The world knows the story: a vastly richer capital knows nothing, and cares still less, for the hinterland. The provinces fear and resent what they do know of the big city’s excesses.

The story’s a familiar one – but in the world’s largest country, things tend to happen on a larger scale. Russia’s Rust Belt, with its dozens upon dozens of forgotten, crumbling industrial outposts, is no exception. The cultural and economic chasms between the metropolis and the hinterland are only getting bigger and more glaring. Russia hasn’t yet seen the sort of Rust Belt rebellion that has hit Europe and North America. But it can surely only be a matter of time.

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By Liam Halligan

Ask your typical Muscovite what they know of the almost seven million square miles of territory that makes up the rest of their mind-bogglingly massive country, and you’ll get a few predictable answers. St Petersburg is lovely. The Tsars’ old capital can be a wonderful break from the stress of Moscow life. Sochi too, with its subtropical climate and post-Winter Olympics boom, is a firm favourite.

After that, it gets harder. Our archetypical Muscovite will know little more of the motherland. Mention Siberia, and they’ll respond like anyone else: a freezing expanse of Gulags and bears that’s equal parts mysterious and scary. Beyond those old haunts, their knowledge of the Russian Federation is a route that extends for 30 kilometres north-west of Red Square and ends at the departures lounge of Sheremetyevo International Airport.

But drive those 30 kilometres in any other direction and you will find the real Russia. This a country of mouldering low-rise concrete, of 200-dollar-a-month pensions, of the never-ending brain drain.

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By Peter Franklin

This is a Russia that definitely did not make the World Cup cut. Out here, our Muscovite might sometimes glimpse it, though strictly at 35,000 feet as Aeroflot carries them off to Rome, Dubai or Bangkok. This isn’t so much flyover country as flyaway country.

Not, of course, that the real Russia is the provincial hellhole of Muscovite nightmares. Plenty of cities, variously leveraging savvy marketing, rich histories and natural resources, have managed to convert themselves into the sort of places that might attract investors and tourists. But for all that Kazan, Russia’s oil capital, the Pacific port of Vladivostok, or the Urals hub of Yekaterinburg have fashioned themselves into mini-Moscows, the original version mostly hasn’t noticed.

More to the point, surviving as a provincial Russian city can be a cutthroat business. For every city that has carved out a niche of its own, there’s usually one just down the road that hasn’t, bled dry of funding, citizens, and attention. These loser cities, the poor relations of contemporary Russia, are where discontent is rumbling.

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Omsk is one such place. Squatting on a muddy riverside in endlessly flat and featureless western Siberia, Omsk is somewhere our internet-savvy Muscovite will know. It has been made famous by an internet meme about the locals’ alleged proclivities for heroin abuse.

Once a major Soviet industrial hub, Omsk is the sort of place that never really recovered from the decade-long succession of economic and social disasters of Russia’s 1990s. Crueller still is how Novosibirsk, Omsk’s neighbour eight hours to the east, Russia’s third city and Siberia’s de facto capital, has grown into a confident and successful metropolis.

By contrast, Omsk’s history has been of decline. This year, news that their home stadium had structural flaws so serious as to pose a danger to fans and athletes forced Omsk’s Avangard ice hockey team to relocate to a new home, three timezones and well over 1,000 miles away, causing uproar among fans and locals. Predictably the team’s new home is located just outside Moscow.

Most symbolic of Omsk’s decline, however, is the story of the city Metro. Work began in 1992, and was suspended and resumed several times, before being definitively halted this year after Moscow informed the city that no more funds would be forthcoming. The city’s final reminder of what might have been is a single pedestrian tunnel, passing under a busy, anonymous junction, marked with a large red sign, bleakly proclaiming ‘Metro’.

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Though Omsk’s population is officially around 1.1 million, or so it boasted just prior to the Soviet collapse, locals often doubt that. As the young try their luck elsewhere, often by heading off to become newly minted Muscovites themselves, the real figure, they claim, has dipped below a million.

This particular preoccupation may seem obscure, but in Russia, it’s an important milestone of decline: cities of one million or more can expect extra investment. For those that slip below, funding will rapidly dry up.

As the government withdrew, business has stepped in. Gazprom  – which has a refinery outside Omsk – recently refurbished the city centre, littering the place with quaint, mock 19th-century cobblestones and mansions. Crowning the urban renewal was a grand new art gallery that served as Omsk’s cultural heart. Until, that is, the curators resigned en masse and moved to Novosibirsk, having been offered higher salaries in Omsk’s booming neighbour, only eight hours away by train.

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By Henry Olsen

Far away from Omsk’s decay, its rust belt cousins in Europe and America, culturally and economically estranged from their own capitals, are making headlines, delivering political shocks to their own Moscows. Omsk could well be next.

So far, the Russian Rust Belt’s suffering has been mostly silent. In places like Omsk, not having been the principal beneficiaries of Russia’s mid 2000s oil boom, locals’ economic expectations have been more that life should not actively get worse, rather than that it should actually get better. They do, however, appreciate Russian muscle-flexing overseas and stability at home. Add in a parochial dislike of Moscow’s westernised cosmopolitanism, and you’ve got a thoroughly loyalist population. Omsk, and cities like it, have been places where the briefest presidential appearance on television screens can provoke a round of public applause.

But the government’s deal with the provinces, that life should at least be prevented from getting any worse, in exchange for which cities like Omsk would throw their weigh behind the authorities, is breaking down. Oil booms are a thing of the past, and with sanctions taking their steady toll, there are shortfalls to be made up.

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By Philip Blonde

It is cities like Omsk that will have to make them up. With government investment long since dried up, Moscow is finally collecting the taxes that so many Russians, opting for the shadow economy of brown envelopes and cash-in-hand, have not bothered paying.

Even more radically, the government has just pushed through the first increase to Russia’s pension age since Stalin. Having traditionally channelled public spending away from healthcare and education towards buying the loyalty of Russia’s pensioners, this was not a move to be taken lightly. Disproportionately affecting the provinces, with their older populations, the law elicited the sort of public rage that had almost vanished in an increasingly politically docile country. It was lost on few Russians that the male retirement age is now equal to male life expectancy.

Sure enough, earlier this year, the Russian provinces delivered their verdict in regional elections, with various far-flung regions, from Khakassia in Siberia, to Vladimir in the rural west, to Khabarovsk in the Far East, electing opposition governors. Omsk, too, re-elected a rare governor not drawn from the ranks of the ruling party.

These figures are not, of course, the anti-corruption liberals whose Moscow rallies sometimes make the international press. The provincial opposition, for years a tame irrelevance, domesticated by the government, is much less appealing to, and interested in, the international media.

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They range from ranting nationalists, who complain, among other things, that Russia has not yet fully annexed Ukraine, to communist throwbacks, stolid men whose beetroot complexions and plodding, wooden Marxist-Leninism could have been lifted straight out of Brezhnev’s Russia. Men like this, distinctively Russian takes on a worldwide populist backlash, now govern major swathes of the country.

It’s easy to over-interpret in a country as vast and opaque as Russia. That said, Russia has many, many Omsks. And one more indignity could cause that simmering resentment could boil over.

And then Moscow will have no choice but to take notice of places like Omsk.

Thanks to the now-infamous conspiracy to oust Iran’s prime minister, Mohammed Mosaddeq, in 1953, most people assume that America and Britain have always colluded in the Middle East. But the reality, as I found when I was researching my new book Lords Of The Desert, is that the opposite was normally the case. In the quarter century after the battle of El Alamein in 1942, conflicting interests made Britain and America competitors and often outright rivals in the Middle East. The simmering tension that resulted did much to shape the history of the era.

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Which is the greater threat to the West, Saudi or Iran?

By Michael Burleigh

Even a closer look at the overthrow of Mosaddeq reveals that the British and Americans were, to pinch Doris Kearns Goodwin’s expression, a team of rivals. The British government wanted to make an example of the man who, in 1951, divested it of the refinery it owned at Abadan (through its controlling stake in the Anglo-Iranian Oil Company, which had until that point monopolised oil production in Iran). The refinery was Britain’s greatest overseas asset and was of enormous strategic importance since it produced sterling priced oil that the British government could always afford to buy and, by tax and dividend payments, represented a crucial source of revenue for the Exchequer.

But for two years the Americans resisted British pressure to conspire in a coup. They only changed their minds after Mosaddeq began behaving erratically and they became terrified that he would dump the vast backlog of Iranian oil on the world market. This represented an enormous threat to the Americans’ own great investment in the region, the Arab American Oil Company, better known as Aramco.

In Saudi hands since its nationalisation in 1976, and now back in the news amid uncertainty over whether or not the present king will float it, Aramco was then a privately-owned company that was domiciled in the US and belonged to four major American oil companies. However, Ibn Saud, the first king of the country, who granted the company its concession, regarded it as his piggy bank and raided it frequently. Unwelcome to the company’s executives as this habit was, they offered no resistance, since they lived in constant fear that what the king had given them he might abruptly take away. Their reaction as this fear grew more acute at the end of the 1940s triggered a series of events that explain the rise of the United States and the eclipse of Britain.

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In response to growing pressure from the king, in 1948 the company conceded him a better royalty and agreed to surrender its rights over territory it did not wish to exploit, enabling him to resell them to competitors. However for the king, who needed to support his thousand-strong family and to buy his subjects’ loyalty, that was not enough – especially when another company proved willing to pay far more for some of the land Aramco relinquished, and the fall in the oil price at the end of the decade began to bite into his income. In 1949 he demanded more.

The US government was keen for Aramco to indulge the king. It did not want to lose access to the airbase in Dhahran, which it had built and leased back from the Saudis, because it had no closer base from which to bomb the Soviet Union’s industrial heartland in the event of another war. Moreover, a pipeline from the Gulf to the Mediterranean would soon open, enabling oil produced by Aramco to fuel western Europe’s economic recovery, generating profits for its American shareholders and tax for the US Treasury that would compensate for the outlay of the Marshall Plan. And so, when the king proposed a new arrangement in which he would take half of Aramco’s profit in tax, the State Department official responsible for the Middle East, George McGhee, ignored British pleas not to cave in, and instead encouraged the company’s managers to “roll with the punches.”[1. Foreign Relations of the United States, 1950, volume 5, 106-109, Funkhouser, memorandum of conversation]

Neither Aramco nor its shareholders ended any the worse off, since US tax law (which the Saudis had taken care to research before making their demand) enabled the company to set all the extra tax it owed the Saudis under the new arrangement against its even larger US tax bill. Ultimately it was the US taxpayer who ended up subsidising the increasingly opulent lifestyle of the Saudi royal family.

Even though the “fifty-fifty deal”, as it was called by the Americans, was nothing like as generous as it sounded – because Aramco sold oil to its four shareholders at a discount to the market price, whittling away the profit the Saudis could tax – the consequences of this precedent for the British were profound, as McGhee knew they would be.

Having seen through the deal, the British refused to concede when the Iranian government demanded similar treatment from the Anglo-Iranian Oil Company. Whereas the US Treasury was willing to forgo the tax Aramco paid, Anglo-Iranian’s contribution to the British government’s war-ravaged finances was too important for the Chancellor of the Exchequer to follow suit.

This decision triggered a chain of events. Mosaddeq reacted by nationalising the refinery and, when the dying Attlee government did nothing to retaliate (having been warned off a plot to break Iran in two by the Americans), the Egyptians spied Britain’s weakness and abrogated the treaty that allowed Britain to base its troops on the Suez canal. The Americans piled further pressure on London by tacitly supporting the Egyptian coup the following year that put Gamal Abdel Nasser, who loathed the British, in power. When the British tried to split the developing Saudi-Egyptian axis, the Americans protected their Arab friends. And Eden’s attempt to claw back the initiative from the Americans then ended in the fiasco of Suez and, because of his collusion with the Israelis, the overthrow of the Iraqi monarchy, which was damned by its closeness to Britain.

The fifty-fifty deal is recent but forgotten history which deserves as much attention as Suez in explaining the decline of British influence in the region. It is a timely reminder that, long before Trump came along, the special relationship barely registers in Washington.

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Why there are still deals to be done in Iran

By Liam Halligan

Wilson’s speech marked the start of ‘the American century’ – his country would lead a ‘liberal coalition’ of Western democracies, supported by smaller client states elsewhere. That was the moment, perhaps more than any other, when the US, newly-crowned as the largest economy on earth, laid claim to global hegemony.

China’s current rise to global hegemon has so far been rather different. The International Monetary Fund (IMF) already acknowledges that the People’s Republic has overtaken America as the largest economy on earth – at least on the basis of Purchasing Power Parity (PPP), a measure that adjusts for differences in prices. But China, for now at least, seems unlikely, unwilling and unable to usurp the US by taking on a military leadership role, engaging in far-flung conflicts or acting as a global arbiter of peace.

The route Beijing is plotting towards worldwide influence and control is more gradual, based less on military prowess, more on economic and financial might. China’s fast growth – averaging more than 7% a year for more than four decades – is now widely acknowledged and understood. Those watching closely may also have noticed that Beijing, off the back of China’s awesome export machine, has amassed the world’s largest stock of foreign exchange reserves – its $3,300 billion haul exceeding that of the entire G7 combined.

Beyond the headlines, though, other developments, far less noticed but no less telling for that, illustrate the extent of China’s financial progress and the scope of its global ambition. And the most significant for a while will be next month’s launch, after a 25-year wait, of oil futures contracts, denominated in yuan, listed on the Shanghai stock exchange and available to global investors.

The launch of a new financial instrument, which sounds rather technical, won’t trouble many Western headline writers on 26 March – the date, just announced by the China Securities and Regulatory Commission, that these contracts will first trade – they’ll no doubt remain fixated on celebrity tittle-tattle, Brexit and Trump. But these new contracts represent a big step in China’s long-held ambition to establish the yuan as a major reserve currency, perhaps one day replacing the dollar as the denomination of choice for worldwide trading, settlement and, crucially, in which central banks hold their reserves.

The key to reserve currency status, history shows, is being a petrocurrency – the currency in which crude oil is priced and traded. China is working on that, too. As it strives to challenge the dollar’s dominance, Beijing boasts important allies – including oil export giants Russia and possibly even Saudi Arabia. And now, by denominating oil contracts in yuan, and allowing them to be traded globally, China will be taking another important step in promoting the use of its currency around the world.

The “exorbitant privilege” of reserve currency status

For much of the 19th and the first few decades of the 20th century, sterling was the world’s reserve currency. Some time during the 1930s, with America confirmed as the world’s commercial powerhouse, having eclipsed the British Empire several decades earlier, the dollar took over as the global currency of choice. That reserve currency status was then confirmed at the landmark 1944 summit in Bretton Woods, New Hampshire, which set up the IMF, World Bank and other US-dominated institutions which formed the architecture of global financial governance that remains broadly in place today.

Since then, global commerce has been conducted largely in dollars and leading economies have held the greenback as their primary reserve currency, in their respective large companies, treasuries and central banks. The advantages this bestows on the US are enormous. Reserve currency status generates huge demand for dollars from governments and firms around the world. This has allowed successive US administrations to spend far more, year-in year-out, than is raised in tax and export revenue.

By the early 1970s, US economic dominance was so assured that even after President Nixon reneged on the dollar’s previously unshakeable convertibility into gold, amounting to a massive default, dollar demand kept growing. As such, for several generations now, America has not needed to worry unduly about balance of payments crises, as it can pay for imports in dollars printed by the Federal Reserve.

Washington can borrow and spend, then, pretty much at will, as long as the world keeps buying ever more US government bonds. The Fed, in other words, uniquely in the world, can ‘print hard currency’.

It is this “exorbitant privilege” – as French statesman Valéry Giscard d’Estaing once sourly observed – that has been the bedrock of America’s post-war hegemony. It is the status of the dollar, above all, that has allowed Washington to get its way, putting the financial squeeze on recalcitrant countries via the IMF while funding foreign wars. To understand politics and power it pays to follow the money. And for most of the past century, that money has been dollars.

A China-Russia tie-up is challenging US hegemony

That US hegemony is now being explicitly challenged – by China. In 2013, President Xi Jinping, laid out the ‘One Belt, One Road’ proposal, a modern equivalent of the old ‘Silk Road’, with Beijing creating a network of railways, roads, pipelines, and utility grids linking China, Central Asia, West Asia, and parts of South Asia. Comprising more than physical connections, OBOR is aiming to be the world’s largest platform for economic cooperation, trade and financial collaboration, as well as social and cultural exchange. This is no idle talk. The ratings agency Fitch estimates that no less than $900 billion of OBOR projects are currently underway.

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In 2014, China then launched the Asian Infrastructure Development Bank, to directly challenge the World Bank. Based in Beijing, the AIIB channels a combination of state and private cash into infrastructure projects around the world – under the tutelage of China, not the US. America initially discouraged other large Western economies from joining the AIIB’s board, but Washington was defied, including by the UK.

China has, in addition, backed the creation of the New Development Bank (NDB), often referred to as ‘The Brics bank’. Established by Brazil, Russia, India, China and South Africa, this Shanghai-based lender extends finance to both public and private projects globally, once again challenging the dominance of the US-led Bretton Woods institutions. Billions of dollars of NDB loans have already been extended for projects ranging from renewable energy, to rural drinking water, to information technology.

Aside from high-profile institution building, China is also asserting itself by building bonds of economic co-operation that, in turn, will boost the role of the yuan. It is in this regard that the new Shanghai-listed oil contracts are so crucial. And they are being launched in the context of an ever-strengthening bilateral relationship, of primary importance to both sides, between China and Russia.

Enemies for much of the Cold War, China and Russia have spent the last decade building serious commercial ties across their 2,700-mile border. Trade between them, just $12 billion back in 2007, soared to $85 billion last year. Both sides recognise the vast synergies between Russia, the world’s largest energy exporter and a bridge to continental Europe, and China, not only the world’s largest manufacturer but, since last year, the biggest oil importer too.

In 2009, Rosneft secured a $25 billion oil swap contract with China. The state-run Russian oil giant signed an additional $270 billion deal in 2013, agreeing to send an extra 300,000 barrels a day eastward for 25 years, doubling its crude supplies to China. Russia is now the largest exporter to the People’s Republic, selling around a fifth of its exports to China, which in 2017 averaged around 1 million barrels a day.

These crude exports have risen steadily since the 2010 opening of the Sino-Russian ESPO (East-Siberia-Pacific-Ocean) pipeline. A second ESPO pipeline then opened last month, doubling Russia’s export capacity to China. The geopolitical implications of this China-Russia tie-up are obvious, for those prepared to think them through – and not necessarily advantageous to the West.

Moscow, for one thing, with a major alternative buyer of its hydrocarbons, now has more price leverage when selling energy to Europe. But the broader importance of this emerging pan-Siberian link-up is that, by extending existing yuan-ruble swap arrangements, and settling massive energy trades in a currency other than the dollar, these two nations are directly challenging the predominance of the US currency.

Crude oil is currently priced in dollars, of course. The two main global price indices – for ‘Brent Crude’ and ‘West Texan Intermediate’ – are remnants of Anglo-Saxon global rules. But China’s voracious appetite for energy imports, and America’s increased focus on domestic production, mean the days of dollar-priced energy, and related dollar-dominance, are starting to look numbered.

That’s why Beijing has already struck numerous trade agreements with major commercial partners such as Brazil and India that bypass the dollar. If Beijing and Moscow – representing, respectively, the biggest demander and supplier of exported energy on earth – decided totally to drop dollar energy pricing, while encouraging others to do the same, America’s reserve currency status would start to unravel. That, in turn, would undermine the US Treasury market, seriously complicating Washington’s ability to rack up enormous annual budget deficits and finance its vast, and still fast-growing, $20 trillion of dollar-denominated debt.

The yuan may not become the reserve currency, but the era of the dollar is ending

Originally attracted by the dollar’s stability, the big emerging markets have become increasingly miffed in recent years by America’s deliberate currency debasement, as Washington has fired up the virtual printing press in the aftermath of the 2008 financial crisis.

Since the quantitative easing began, the US base money supply has ballooned from $800 billion in 2009 to well over $5,000 billion now. That’s bad news for foreign creditors like China, with vast dollar-denominated reserves and debt instruments, diluting the value of what they are owed.

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These concerns over dollar depreciation, plus a desire to divert part of America’s “exorbitant privilege”, has seen China and Russia cut a number of non-dollar energy deals, which have the added advantage of avoiding US sanctions, or any other random controls imposed by the US banking system. Moscow and Beijing are now stepping up bi-lateral large-scale non-dollar settlement, in the form of currency swaps and specific deals. Much of the $27 billion Russia is using to finance its vast Yamal Arctic liquid natural gas project, for instance, is coming from Chinese lenders.

With these new crude contracts priced in local currency, Beijing is helping Russia – along with Iran, that other key power necessary for Chinese-led Eurasian integration – short-circuit US sanctions by trading energy in their own currencies, or in yuan.

Naysayers claim the dollar will stay supreme. On-going capital controls, which restrict movements of money in and out of China, will spook foreign investors, they say. So Shanghai’s oil contracts will remain an offbeat, exotic investment, rather than position the yuan as a petrocurrency.

Not so, the Chinese authorities shoot back. The yuan will soon be fully convertible into gold on both the Shanghai and Hong Kong exchanges, they claim. The key is that the dollar is being bypassed and, in this ‘Asian century’, the unique status of the US currency is a relic of a bygone era.

Beijing is staging a full-frontal attack, with other large powers in its corner. Along with Russia, China is also pressuring Saudi Arabia – the lynchpin of the OPEC exporters’ cartel – to price its oil exports in yuan. Beijing has already made an offer to “take a large strategic stake” in Saudi Aramco, the state-owned oil monolith, which an increasingly cash-strapped Riyadh is being forced partly to privatise. And with plenty of cash reserves at the ready, Beijing can extend further largesse to the Saudis, until it gets what it wants.

The dollar’s reserve status won’t end overnight. The US currency still accounts for around 60% of central bank reserves around the world, though that is down from 80% in the 1970s. But the yuan has made a start.

My guess is that, pretty soon, within a decade or so, a ‘reserve currency basket’ may emerge, with central banks storing wealth in some combination of dollars, yuan, rupee, reals and rubles, as well as precious metals. Perhaps some kind of synthetic mix of the world’s leading currencies will emerge, with emphasis placed, after years of QE, on assets backed by commodities and other tangibles, as well as crypto-currencies.

China’s new oil contracts, though, will expand ruble-yuan oil trading across the vast Eurasian landmass, and with broader non-dollar commodity trading beyond that, turn up the heat up on the West. It brings us closer to the dissolution of America’s unique reserve currency status, ushering in a new multipolar world order.

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For sure, thawing ice caps receive huge attention from environmental correspondents and activists. Defence experts also increasingly report on the militarisation of the Arctic – mainly by Russia. There’s also the Baltic threat which, this week, saw ten million Swedes being instructed to urgently brush up on their civil defence skills.

After allowing fifty Cold War era installations to fall into icy desuetude in the 1990s, in August 2007 Vladimir Putin signalled a return to the Arctic. A mini Russian submersible planted a metal Russian flag 4,261 metres below the North Pole.  Putin compared this with the Apollo spacecraft putting the Stars and Stripes on the Moon. In 2001 Russia asserted rights over the Lomonosov Ridge, an 1,800 kilometer underwater mountainous feature, within Russia’s Arctic zone of interest, but which lies far beyond Russia’s official continental shelf. Canada and Denmark dispute that claim, which may involve billions of barrels of oil too.

The Russians are scaling up two existing Arctic warfare brigades into divisions. These heavily insulated troops move around on quadricycles or sleighs pulled by reindeer. There are also 14 operational airbases. By contrast, the Americans – who have had a big airbase at Thule on Greenland since 1951, have been slow to take an interest in the Arctic. For example, the US has one functioning icebreaker (two less than Kazakhstan has on the Caspian Sea) whereas Russia has forty, of which six are nuclear-powered. Despite the US being a founder member of the Arctic Council, which since 1996 effectively governs the north polar region, the Arctic falls through a number of US bureaucratic cracks, and the Trump administration has not appointed a new Arctic Envoy. Its pervasive scepticism towards man-made climate change does not help either.

As elsewhere, the Russians are like one of the empty shells in the old three shells hiding a pea trick. You need sharp eyes to know where the pea really is.

In 2013 the Arctic Council’s existing members – Canada, Denmark, Finland, Iceland, Norway, Russia, Sweden and the US (all of which sound pretty chilly to me) – welcomed a new observer member, even though its most northerly point is 1,000 kilometres south of the Arctic Circle. This was China, which got round mere geography by claiming that its coastal cities face catastrophic flooding from melting ice caps, which justified Beijing being an “Arctic stakeholder’”.

Some of the existing Arctic Council members were inclined to give China a warm welcome:

• Beijing helped Icelandic banks out of their plight with a $500 million currency swop, while CNOOC[1.  The China National Offshore Oil Corporation] has invested heavily in offshore oil exploration.
• Greenland has benefited from an iron ore pellet mine and processing plant at Isua, while Denmark itself received a $740 million investment in the agriculture and green energy sectors.
• China supported Canada in its long running maritime dispute with the US over the North West Passage linking the Atlantic and Pacific, for Canada’s exclusive claims mirror those made by China herself in the  East and South China Seas. The Chinese may also invest in developing the port of Wellington in northern Manitoba after a US company failed to make a go of it.
• Even Norway, which was put on China’s naughty step after dissident Liu Xiaobo was awarded a Nobel Prize in 2010, is back in favour in Beijing. As the biggest customer for salmon, China hit Norwegian exports to the tune of $780-1.3 billion in lost revenue. After ostentatiously refusing to meet the Dalai Lama, relations are back on track and prime minister Erna Solberg has signed a $1.45 billion deal to export salmon to China until 2025.

China says it is a team player in the Arctic, which it certainly shows through concern about global warming, fish conservation, and the fate of the indigenous Aleut, Gwich’, Inuit and Sami peoples. But it also has ambitious plans and it thinks strategically.

Although it has not been much remarked, the colossal $1-8 trillion OBOR project includes an ‘Ice Silk Road’ running north of Russia. One obvious strategic concern is that 85% of China’s energy imports (and 90% of its exports) have to pass through the Bab-el-Mandeb straits between Djibouti (where China has its first modest overseas naval base), Eritrea and Yemen, as well as the pirate-infested Malacca Straits in the Far East. The latter would be highly vulnerable to interdiction by the US Navy in the event of war. Cost is another consideration. An Arctic passage from China to Europe would shave 30% off the fuel costs, while a voyage through the inter-oceanic North West Passage rather than the Panama Canal would knock a couple of thousand nautical miles off the journey. Of course other costs mount. At present, China would have to pay transit fees to Russia, and avail herself of Russian icebreakers which are not cheap to hire. Insurance costs are pretty hefty too. But Beijing has this in hand. While it currently has one diesel-powered icebreaker, the Xuelong or Snow Dragon 1, which it bought from Ukraine in the 1990s, a nuclear-powered Snow Dragon 2 is in the works along with two more.

Also by Michael Burleigh - on China

One Belt, One Road: How China's ambitions span the globe

By Michael Burleigh

Although all relations between China and Russia are a case of smiles all round, or rather are “as close as lips and teeth”, as the Chinese have it, in the Arctic this might not remain the case. For sure, when Putin’s huge Yamal LNG plant ran into financial problems, China used $12 billion to acquire a 36% share, a plant which ironically enough despatched a tanker of LNG to the wintry US this month, despite the owner (Novatek) being subjected to US sanctions. Moreover, because the Russians made the mistake of limiting oil and gas exploration in the Arctic to Gazprom and Rosneft, it was not long before EU and US sanctions meant the arrival of the huge Chinese Nanhai-8 deep water drilling rig at Murmansk.

The Arctic region contains 13% of the world’s estimated undiscovered oil reserves, 30% of unrecovered natural gas deposits, and 20% of undiscovered natural gas liquids. The Arctic is also rich in diamonds, gold and nickel.

At present, the Russians seem relaxed about the arrival in the Arctic region of their cash-flush ally. But even as China acquired observer status in the Arctic Council, the then President Medvedev was quick to stress that only existing Arctic Council members make the rules because “this is natural, this is our region, we live here. This is our native land”.

One likely clash might occur were Chinese shipping to venture further north (the Chinese talk of a ‘central seaway’ nearer the Pole) beyond Russia’s 200 mile exclusive nautical zone, which would make them independent of Russia’s poor maritime infrastructure as well as the hefty transit fees the Russians are seeking (not to mention the fees for their icebreakers). Taking the long view of everything, the Chinese are confident that will soon be the case as the polar ice melts further.

At the other end of the world, the Chinese are similarly hyper active. Although their nefarious activities in Australia have recently attracted much attention, it is probably New Zealand that should be more worrying. For years they have been buying up dairy farms. Some of them seem to have been used to launch high altitude balloons, which may be connected some suspect, to China’s interest in low orbital space warfare, in which they would blind US military communications satellites on Day One. As elsewhere, some in New Zealand are worried about the (intelligence) backgrounds of members of parliament from the Chinese diaspora, not to mention the fact that three of New Zealand’s last four prime ministers are directors of mainland Chinese banks.

The exploitation of ‘tight oil’ fields in Texas, North Dakota and the Appalachians has transformed the US oil complex – pushing total output to 12.4 million barrels a day in 2016, up from just 6.8 million barrels daily in 2006.

Since 2012, in fact, using horizontal drilling, multi-stage fracturing, seismic imaging and other ‘non-conventional’ techniques on shale formations, America has routinely out-produced Saudi.­

It’s important to remember, though, that the Desert Kingdom can ‘turn the spigot’ any time it likes, ramping up its conventional oil production by drawing from comparatively accessible wells. Lately, of course, Saudi has been trying to keep a lid on production, with Riyadh working at the heart of the OPEC exporters’ cartel to limit global oil supplies, in a bid to push prices up.

One should also remember that while the Saudi-US oil rivalry is eye-catching, both countries are competing for the title of top oil producer with Russia. Despite its reputation for inefficiency, and ageing equipment, the long-established Russian oil industry has consistently produced around 11 million barrels daily over the last ten years, a record matched only by Saudi. Russia also has the world’s largest gas natural reserves – making it, in many ways, the world’s true energy superpower.

America’s claim to oil supremacy is further dented by the reality that, as the biggest crude consumer on earth, soaking up 20 million barrels a day, it remains dependent on a massive 8 million barrels daily of net oil imports. Russia and Saudi, meanwhile, are by far the world’s two biggest crude exporters.

The ‘shale revolution’, then, is a heady story of ingenuity, grit and brave investment – all the things that have, for well over a century now, made the US the global economic powerhouse. But the punchy shale industry is nowhere near ending America’s ongoing ‘foreign energy dependence’. The US economy relies heavily on crude pumped overseas, often in countries that aren’t friendly. That won’t change anytime soon.

Oil clearly imposes many costs – geopolitical, economic and environmental – on large Western crude importers such as the US. But change could be coming. For there is a growing body of opinion that rapid advances in battery technology, and especially the widespread use of electric vehicles, could soon upend the global oil industry – providing a major economic and geopolitical premium for the West.

Transport accounts for around 70% of all crude use, with cars and trucks currently using around half of all oil produced. That’s why some believe that, as electric vehicles become more common, oil will display significant ‘demand destruction’, causing crude prices to plummet and stay low. It’s certainly the case, as Peter Franklin says, that “governments and car manufacturers are queuing up to announce their plans for a comprehensive switch to electric vehicles over the next two or three decades”.

As such, analysts are already thinking through not just the economic and commercial impact, but also the geopolitical implications of permanently lower oil prices. What would happen to Russia, for instance, if $10 crude became the norm?

Bearing up

Russia’s combined oil and gas sectors account for around 16% of GDP. While the country’s hydrocarbon dependence has fallen sharply since 2000, when oil and gas made up 40% of the economy, it still remains too high. Oil and gas taxation, moreover, generated 38% of state revenues during the first three months of 2017, according to Russian Ministry of Finance, and around 60% of all export receipts. Energy continues to loom large in the Russian economy.

The Russian oil industry, though, has two features that make it rather resilient when oil prices fall – as they did, from an average of $109 in 2014 to $52 in 2016. The first is that the preponderance of sub-surface and relatively shallow wells means that ‘lifting costs’ across Russia – the price of producing each barrel of oil – are rather low.

Harsh North Sea conditions make the UK a relatively high-cost producer – at $52 a barrel during 2016. In Brazil, the figure was $48. Lifting costs in Canada averaged $41 last year – tar sands production is itself energy-intensive – while in Nigeria it was $31.

In Russia, though, lifting costs averaged just $17 last year. As such, even at relatively low crude prices, the industry remains profitable – which keeps the oil flowing and the tax and export revenues rolling in.

The other mechanism that helps Russia withstand lower oil prices is the floating ruble. When crude prices drop, so does the Russian currency – given widespread international perceptions the economy consists of little else but hydrocarbons. This lock-step relationship between the dollar-ruble exchange rate and the oil price, in turn, helps the Russian oil industry when crude falls – because almost all its costs are denominated in rubles, while its revenues, from the oil sold abroad, are in dollars.

A lower dollar-terms oil price, then, brings down domestic ruble production costs, while the dollars from Russia’s oil exports become stronger in ruble terms – helping to maintain margins even though the crude price has fallen.

While still too dependent on commodities, the Russian economy has actually diversified significantly in recent years. The country’s service sector now commands around 60% of GDP, more than three times the share of oil and gas. This reality, combined with low lifting costs and the ruble free-float, help explain why the Russian economy is less oil dependent than is commonly understood.

Some 50% of Kuwaiti GDP derives from oil and gas, and 45% in Saudi. Venezuela is also heavily energy dependent, with hydrocarbons generating 25% of GDP. Russia’s 16% figure is also lower than that of Norway – where hydrocarbons account for 22% of the economy. Like Norway, though, Russia has used its oil wealth relatively wisely in the past, helping it withstand lower crude prices today.

Back in 1998, in the midst of a global systemic crisis sparked initially by a financial collapse in Thailand, Russia’s post-Soviet economy was extremely fragile, and Moscow famously defaulted on several tranches of Soviet-era debt. It resulted in Russia becoming the largest debtor of the International Monetary Fund.

But after that, as oil prices rose steady from less than $30 in 2001, to over $140 in 2008, Russia channeled much of its oil revenues into debt repayment and the accumulation of financial reserves – a process that enjoyed public support, given the trauma of the collapse. Moscow now boasts a gross national debt of just 15% of GDP – the lowest of any major economy – and one of the world’s largest hauls of foreign exchange reserves. In net terms, in fact, IMF figures show that Russia is a creditor to the rest of the world. Moscow has also built up a budget stabilisation fund, financed by oil revenues when prices are high, to help limit annual budget deficits when crude price is low.

In 2014, the combination of lower oil prices and Western sanctions imposed as a punishment for taking control of Ukraine’s Crimea region sent Russia into recession. Having contracted 2.8% in 2015 and 0.2% last year, the economy is now on course to expand by 2% in 2017. A recovery in consumer demand and investment, is combining with a more stable currency and, significantly, lower inflation. While Russian CPI inflation averaged 12.9% in 2015 and 5.4% the year after, the October 2017 figure was just 2.7% – by far the lowest in the country’s post-Soviet history.

Variety, comrade!

While Russia has quickly recovered from the recent dip in oil prices, it is clear the economy must further diversify. As it exhausts its low-cost sources of ‘brown’ oil in Western Siberia, Russia will increasingly rely on more remote ‘green’ oil from new fields in Eastern Siberia and, ultimately high-cost ‘blue’ oil from the Arctic Ocean. As ‘lifting costs’ rise, Russia’s ability to cope with oil price swings will diminish.

An oil price of around $40 gives Russia the best incentive to diversify. That price allows the industry to maintain solid production, while investing in extraction and refining projects. Under the existing tax system, though, revenues from the oil industry would be rather small, forcing the government to encourage more rapid diversification. Moscow seems to back such a strategy – having based its entire 2017 government budget on the basis of $40 oil.

Unless such diversification happens, oil at $10 would cause Russia some serious problems. While the government has large financial reserves, these would not last long, given that almost two-fifths of state revenues currently derive from hydrocarbons.

Western analysts examining the potential impact of cheaper oil seem caught between wanting the Russian economy to splutter, while worrying also about the potential knock-on effects of the country seeing its budget revenues slip.

“How will Russia react once the ‘cheap oil’ recession really kicks in?” asked the 2016 edition of the NATO Review. “Will it acknowledge the challenge and face it head-on, by seeking to modernize and diversify its economy, or will it seek to distract its public … one cannot discount the risk that the leadership will seek to divert attention by engaging in foreign policy adventurism”.

My view is that we won’t see $10 any time soon. The Economist magazine famously said it was coming, in cover stories both in 1999 and 2003. In both cases, the price of crude surged.

The advent of electric cars is clearly very important, and that could drastically cut oil use – especially if the electricity is generated using nuclear or gas-powered turbines, or renewables. But the vested interests connected with the internal combustion engine are enormous and they’re not just going to withdraw quietly. Nor, likewise, is the global oil industry itself – perhaps the biggest vested interest of them all.

Which may be just as well. Because, while a gradually falling oil price would be beneficial, a rapid and permanent collapse would cause social and political havoc – not only in Russia, but to a far greater extent in Nigeria, Venezuela and across much of the Middle East.

For all our focus on irresponsible banks, it was in fact the soaring price of oil – and its impact on household budgets – that pushed America into recession.

It’s easy, therefore, to assume the corollary is true – low oil prices are good for families. When transport and energy costs are lower, the household budget goes further. Spending goes up, the economy flourishes – all is well. Except, of course, if you’ve lost your well-paid job because it’s no longer economical to drill, not with so many cheap and easy alternative energy sources on the market.

As our dependency on oil decreases, its price becomes less and less relevant. Right now, oil is a pocketbook issue, but if the trend for alternatives ratchets in pace, that may well change.

Sky-high oil prices hit low and middle-income families hard

Based on the historical relationship between oil price and GDP, economist James Hamilton says that the Great Recession was predictable.[1. James Hamilton, Causes and Consequences of the Oil Shock of 2007–08, Brookings, Spring 2009] Well, it would have been if we’d known what was going to happen to the price of oil. It was the collapse in auto sales and subsequent fall in employment in auto-related manufacturing, precipitated by sky-high oil prices, that triggered the recession – without the oil shock, Hamiliton says, we’d be talking about slow growth.

‘But it was the housing bubble that led to the crash, which in turn led to the recession’, you might reasonably say. Certainly, housing was a contributing factor. But housing had already been acting as a “significant drag”[2. Ibid] on the economy.

It was excessively high oil prices that explain why, in 2007, house prices in US metropolitan areas saw big drops in zip codes with long commutes, but modest increases in those closest to city centres. When gas is expensive, distance to work matters, with families being forced to choose between filling the tank or paying the mortgage – tellingly, foreclosure rates increased as distance from urban centres increased.[3. James Hamilton, Causes and Consequences of the Oil Shock of 2007–08, Brookings, Spring 2009] Derek Thompson, writing in the Atlantic, points out that as oil prices started to increase from 2005, house building decreased. [4. Derek Thompson, ‘Rick Santorum Is Right: Gas Prices Caused the Great Recession’, The Atlantic, 8 February 2012]

This sensitivity to oil price is hardly surprising: the most popular vehicle in America is a truck – the Ford F-Series to get specific – which takes around 27 gallons of petrol. When the price of gas doubled, filling the tank went from around $50 to more than $100. You don’t have to be living on a shoe-string for that to devastate the family budget.

Low oil prices are a boon to consumers

Lower prices, on the other hand, means cheaper transport and energy costs, and that means more money in the pockets of consumers. Stephen Moore, writing for the Wall Street Journal, provides a “rule of thumb” for what that means in economic terms.

“Every one-penny reduction in gas prices puts more than $1 billion a year into the hands of consumers for them to save or to spend on other things. So, that $1.50 reduction in the price at the pump has been a $150 billion a year stimulus plan.”[5. .‘Are Low Oil Prices Good for the Economy?’, The Wall Street Journal, 13 November 2016]

A family with dollars to spare, might treat the kids to a trip to the cinema, or buy those new trainers. They might deposit a little more in their 401k, or the family savings account (which is then invested). According to Oxford Economics, a $20 fall in the price of oil provides a 0.4% boost to global growth within a three-year period.[6. .‘Winners and losers of oil price plunge’, The Financial Times, 15 December 2014] And while GDP is a flawed measure when it comes to assessing standard of living, expansion is undoubtedly better than contraction.

So the lower the oil price the better… Except, of course, that families are not just consumers, they’re also workers.

What if your job depends on the oil industry?

Rock-bottom oil prices don’t look so good if your livelihood depends on the industry. In Texas, it is estimated that a third of jobs in the oil and gas sector were lost as a result of the price collapse. In the UK, the number of people employed in the North Sea energy sector plunged from almost half a million before the price collapse to 315,000 by the end of 2016, and the sector has continued to shed jobs in 2017.[7. Adam Vaughan, ‘North Sea oil and gas sector losing thousands of jobs, survey shows’, the Guardian, 6 September 2017]

In Houston –America’s oil capital – more than 77,000 people working in oil-related jobs have been handed pink slips. For those who haven’t moved into alternative jobs, lower household transport and energy costs are no compensation for unemployment. Analysis by the University of Houston’s Bauer College of Business illustrates the vulnerability of an economy so dependent on oil:[8. Robert Gilmer, ‘A False Start for Oil Markets in 2017 Means Weak Prospects For Houston’s Economy’, University of Houston, 11 September 2017]

“The strong growth from 2011-2014 demonstrates the power of the fracking boom; it is equally remarkable how quickly employment growth ended after oil prices collapsed in late 2014… The current estimate of job gains in the oil and gas sector for 2017 is 7,100 jobs, or about 9 percent of the 77,200 jobs that were lost to the oil bust.”

Or as Richard Parker writing in The New York Times in September put it: “The tale of the Texas Miracle was a big fat lie: Plentiful oil, low regulation and even lower taxes are not a panacea.”[9. Richard Parker, ‘Why Texas is no longer feeling miraculous’, The New York Times, 22 September 2017] If oil prices were to plummet to anywhere near $10 a barrel, even the vastly cheaper, technology-enabled fracking would be uneconomical – and legislators in oil-dependent regions would need to radically overhaul their economic model.

In fact, even if oil does remain above the break-even price for shale drilling (which, depending on the well and company, can be as low as $30[10. Robert Rapier, ‘The Break Even Cost for Shale Oil’, Forbes, 29 February 2016]), government action is still needed.

Those lost jobs are not coming back – or at least not at scale; estimates suggest between a third and half have disappeared for good.[11. David Wethe, ‘Robots are Taking Over Oil Rigs’, Bloomberg, 24 January 2017] Earlier this year, for example, The New York Times reported that West Texas producer Pioneer Natural Resources added almost 240 wells in 2016 without adding any additional employees.[12. Clifford Krauss, ‘Texas Oil Fields Rebound From Price Lull, but Jobs Are Left Behind’, The New York Times, 19 February 2017]

Algorithms and robotics have already replaced many roles, and technology is advancing at pace. Drills can be controlled remotely by a technician sitting behind a computer. Drones can be used to inspect equipment. These technological developments mean the sector needs software specialists and data technicians – and that shift in skills-demand means different types of training.

It also means alternative sectors and jobs need to be nurtured to compensate for the much lower numbers employed in oil-related roles – to avoid the fate of the former manufacturing heartlands that failed to evolve new industries.

Oil-dependent regions could, for example, retain their energy focus, but through industries vying to replace fossil fuel dependency (in 2016 the number of jobs in solar energy surpassed those in oil and natural gas extraction[13. Anna Hirtenstein, ‘Clean-Energy Jobs Surpass Oil Drilling for First Time in U.S.’, Bloomberg, 25 May 2016]).

Even in oil consuming (rather than producing) regions, the assumption that low prices are good, and high prices are bad is becoming more complicated. The rise of renewables, alongside other demand destroying technology such as electric cars, is changing the terms of the debate.

In Texas, renewables are playing an increasing role in energy supply – if it were a country, the Lone Star State would be the sixth largest wind-power in the world.[14. Pilita Clark, ‘The Big Green Bang: how renewable energy became unstoppable’, Financial Times, 18 May 2017] More and more American states are embracing targets for a minimum percentage of retail supply to come from renewables. As for electric cars, an International Monetary Fund paper suggests they will have all but replaced petrol-powered vehicles in OECD nations by the early 2040s.[15. Reda Cherif, Fuad Hasanov, and Aditya Pande, ‘Riding the Energy Transition: Oil Beyond 2040’, IMF, May 2017]

If it is a move away from oil that drives plummeting prices, then the standard of living implications will be very different to those resulting from an over-supply. Put simply, if consumers retain a thirst for oil, then low prices help them. But if the demand isn’t there, or is significantly reduced, family budgets may be insulated from price hikes, but they also gain little from price reductions.

As dramatic an impact the oil shock had, in a new world of alternatives, low prices won’t be the boon to families they once were.

Nowadays few people could name Saudi Arabia’s ‘oil’ minister, who as the Minister of Energy, Industry and Mineral Resources doesn’t even have ‘oil’ in his title. (He is Khalid al-Falih, by the way.)

Yet more than forty years ago many could easily identify the dapper Sheikh Ahmed Zaki Yamani. He was the kingdom’s Minister for Oil from 1962 to 1986, and a major player in the OPEC association.  Yamani’s celebrity was stratospheric, especially after he and other OPEC colleagues were held hostage in Vienna by the terrorist Carlos the Jackal in 1975.

Texas inspires OPEC

The Organisation of Petroleum Exporting Countries was established in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

It was a cover version of the Texas Railroad Commission (TRC), which controlled US oil prices up until 1970 (when it relinquished this role and let US producers charge what they liked). Within a year there was no spare production capacity available in the US, which meant power over oil prices migrated to OPEC.

OPEC was never quite a cartel, for unlike the TRC it did not have the Texas Rangers as enforcers, as one American oilman quipped. Only Saudi Arabia had the power to unilaterally influence prices because of its huge ‘swing’ spare capacity, and even then it would need the other OPEC members follow its lead, something that has proved more tricky over time. The world’s largest oil producer is not, however, Saudi Arabia but Russia, which has always resisted OPEC membership since Soviet times, being unwilling to put the fate of its armed forces in the hands of an Arab committee.

Gold, dollars and oil prices

The 1973-74 oil price shock had a history. Oil producing nations had been angered by the US decision to come off the gold standard in 1971, depressing oil revenues which were earned in depreciated dollars. Some of the more militant Middle East and North Africa  (MENA) regimes ‘de-colonised’ petroleum: for example Algeria’s new nationalised Sonatrach gobbled up French and US producers.

Oil might also be used as a geopolitical weapon, something the producers were slow to discover, partly because their industries were nascent and involved partnerships with western oil majors who in turn were facing competition from the newer breed of independents.

Algeria’s President Boumedienne joined Libya’s Colonel Qaddafi in linking oil supplies to western support for Israel. Symbolically when in May 1973 Israel celebrated a quarter century of independence, Algeria, Iraq, and Kuwait turned off their oil production for an hour, and Libya for the entire day. These countries also warned of an oil embargo should the West support Israel in any new war with Arab nations. The Saudis reluctantly fell in behind the radicals[2.  Benjamin Stora, Algeria 1830-2000. A Short History, Ithaca 2001].

The Yom Kippur War and the 1973-74 embargo

On 5^th October 1973 Egypt and Syria attacked Israel, pushing it onto the back foot for the first time. On 17^th October OPEC declared an oil embargo against the US and the Netherlands in retaliation for their military supplies to Israel in the Yom Kippur War.

OAPEC (the Organisation of Arab Petroleum Exporting Countries – a cartel within the OPEC cartel) raised the price of oil by 70%, and cut production in monthly 5% increments, so as to force Israel back to its 1967 borders. This entailed a net loss of 4 million barrels per day (bpd) until the embargo was lifted in March 1974. During that time, the price of oil quadrupled from $3 to $12 per barrel (in today’s money, $17 to $68).

The Arab producers (and the Shah’s Iran) categorised countries as ‘friendly’ or ‘unfriendly’ with no room for such would-be neutrals as Japan. This threatened to split the West, with the British and French the most craven towards the Arabs, while the Germans and Dutch took a harder line[2.  For the details see Daniel Yergin, The Prize. The Epic Quest for Oil, Money & Power, London, 2008].

As stalwart supporters of Israel, the Dutch suffered badly, partly because Shell’s assets could be nationalised (as they were in Iraq) but also because of the huge importance of Rotterdam and Rijnmond which refined and distributed Middle Eastern oil across the rest of northern Europe[3.  Duco Hellema, Cees Wiebes, Toby Witte, The Netherlands and the Oil Crisis: Business as Usual, Amsterdam, 1998].

The knee-jerk response

The impact of the oil embargo and price hike was dramatic, especially on societies in Western Europe and Japan which imagined they had left behind the austerities of a world war that was within living memory for most adults. US GNP declined by 6% between 1973 and 1975 and unemployment doubled to 9%. Long lines formed at US gasoline stations, 20% of which had run out of fuel by early 1974. The national speed limit was reduced to 55mph. Motorists with number plates ending in even or odd digits were only allowed to refuel on corresponding days of the month. Both the Daytona races and Christmas lights were banned. In 1975 manufacturers were required to raise vehicle mileage from 13.5 to 27 miles per gallon[4.  These details, with striking illustrations, are from the Smithsonian National Museum of American History https://americanhistory.si.edu/american-enterprise-exhibition/consumer-era/energy-crisis].

The strategic response

However, the West adapted – as it has done ever since. High prices meant that costly and technically difficult exploration in the North Sea, Siberia, Colombia, Alaska and the Gulf of Mexico became financially viable. By 1983, the North Sea alone was producing more oil than Algeria, Libya and Nigeria combined. Soviet-supplied natural gas also relieved Europe’s energy demands without creating the strategic dependencies the Americans feared. Gas supplies were never once interrupted  throughout the Cold War.

Presidents Nixon, Ford and Carter made energy independence a major national priority. In 1975 the US created the Strategic Petroleum Reserve to store up to 700 million barrels of crude petroleum in salt dome caverns.

There was a brief revival of interest in unconventional ‘tight’ or ‘shale’ oil, though as in the First World War, this abated once conventional oil prices fell back. Successive US administrations encouraged the expansion of coal and nuclear in electricity generation, and the development of ethanol and synthetic fuels.  Auto manufacturers ceased building heavy gas-guzzlers; Japanese compacts and European hatchbacks replaced saloons and sedans. There were also moves to improve home insulation, and to use energy more efficiently in factories. The US government imposed price controls on domestic oil so that US producers effectively cushioned US consumers with subsidies.

Oil prices soared again to a high of $35 per barrel in 1980 because of the Iranian Revolution in 1979-80, followed by the outbreak of the Iran-Iraq war which subtracted 6.5 million bpd of supply. But then it fell to $10 by 1986 as alternative supplies came on stream.

From peak oil to peak demand via myriad zigzags

Almost anything influences the price of oil, from hurricanes in the Gulf of Mexico to strikes in Venezuela, the 2011 Arab Spring, rumours of war with Iran, or the opaque activities of commodities futures traders and hedge funds[5.  On NYMEX and ICE see Daniel Yergin, The Quest. Energy, Security and the Remaking of the Modern World, New York, 2012]. Even a significant birthday can do this, as was the case with speculation that the former Saudi oil minister Ali bin Ibrahim al-Naimi would retire on his 80^th birthday, leading to a reduction in production by his successor. In fact, Saudis don’t much celebrate birthdays, and the minister retired later.

Despite a brief hiatus in 1990, coincident with the First Gulf War, crude oil prices steadily declined in the early 1990s. Adjusted for inflation, the 1994 price was the lowest since 1973.

From the mid-1990s oil prices rose again, partly because market-driven turmoil in Russia led to a five million bpd loss of production between 1990-96. This took place at the same time as a rise in demand from the Asia-Pacific region where Japan and South Korea produce virtually no oil, and China is, since 1993, a net importer.

Prices next fell at the end of the 1990s because of a combination of the Asian financial crisis and OPEC over-production. But then came a long rally in demand in the 2000s, which peaked at a record $147 bpd for Brent Crude in 2008. This collapsed with the financial crisis but quickly recovered, despite the Great Recession in the West after 2008, thanks to demand from a rapidly growing China. In 2009 Chinese new car sales exceeded those in the US for the first time[6.  Yergin, The Quest p. 219]. Between 2011-14, oil prices hovered around the $100 mark, but then in 2015 came the latest twist when prices suddenly halved. The price seems stalled at about $50 per barrel[7.  Obviously there is not a unitary oil price since there is Brent Crude or  West Texas Intermediate to consider separately because of their viscosity, volatility and toxicity, among other factors.].

A glut?

Today’s fear is of a glut, with many oil majors planning for the new era of peak demand rather than peak oil (supply), and they have already cut back investment in their more venturesome explorations to the tune of $400+ billion so far.  In advanced economies, growth is decoupling from energy consumption, with even the EU acting robustly to diversify gas supply away from Russia[8.  Lynn Cook, Elena Cherney ‘Get Ready for Peak Oil Demand’ Wall Street Journal 22 May 2017. Chevron and ExxonMobil don’t forecast any peak. BP locate it in the 2040s, Royal Dutch Shell in 2025-30, Statoil in 2030, Total in 2040 and the International Energy Agency say ‘after 2040’. The views of Rosneft, CNOOC and Sinopec were not solicited. Future EU gas supply is likely to come from the Caspian region (Iran) and the East Mediterranean (Egypt, Israel, Cyprus) though there are geopolitical problems with both.].

The glut is attributable to the US shale oil and gas revolution – made available through advances in fracking technology – which might be replicated elsewhere. Meanwhile we are all becoming more conscious of how we use energy.  In 2015 the Saudis deliberately increased production to almost maximum capacity, so as to bankrupt US shale producers, to hurt the Shia Iranians (who were returning to market after the 2015 nuclear deal ended sanctions) and to grab a larger market share in Asia. The result was that the US shale industry simply pedalled harder, with technological leaps and bounds generating more efficiency gains. Although Libya is in anarchy, and much oil is stolen in the Nigerian Delta, both Iran and Iraq are producing a lot more oil too.

Geopolitical consequences

Assessing the wider geopolitical impacts of sudden oil price movements is not straightforward. Let’s look at two. One resulting from historic price highs, the other from contemporary price lows.

Since the 1973-74 oil price shock, the US has been involved to a far deeper extent in the turbulent Middle East than before. The key dilemma was how to square economic self-interest with stalwart support for Israel. Every US Secretary of State has followed Henry Kissinger in touring the region, to diminishing effect, even after the contemporary US shale oil revolution might have resulted in wholesale disengagement. Clearly it is not ‘all about oil’, though as President Trump’s recent visit to Riyadh illustrates, oil revenues obviously relate to both US arms sales and the lure of Gulf investment in Western economies[9.  Henry Kissinger, Years of Upheaval, London, 2011. The British monarchy (and many retired army generals turned salesmen) has multiple ties with the deferential autocracies of the Gulf, though it is arms sales rather than oil which influence policy nowadays, in line with the supermarket maxim ‘TWOFOR’: ‘buy our arms and get our foreign policy free’].

We have yet to witness the full impact of chronically low oil prices on the stability of the Middle East – though given the example of Venezuela, one suspects that trouble is coming. It is said that some MENA regimes need an oil price of $100 to break even[10.  Saudi Arabia needs an $83 break-even price, Iran about $51. Iran has a functioning individual and corporate taxation system of course (devised by Deloitte Canada)], though none has yet gone bust.

The 2011 Arab Spring was certainly destabilising, but it was not caused by oil; Tunisia, Egypt and Bahrain hardly have any. Rather the protests were triggered by corruption and disrespect for human dignity as symbolised by the slogan ‘Enough!’

Oil exit

Oil revenue has traditionally shielded Gulf Arab rentier petro-monarchies from being democratically accountable, since production costs are low ($10-20 pb in Saudi Arabia) and their peoples pay no taxes, while benefiting from subsidies that meant that gasoline was cheaper than bottled mineral water. With revenues on the slide, budget cuts, borrowing and repatriation of overseas investments are not enough to compensate. Even the Saudis are down to their last $500 billion of sovereign reserves. Hence the vaulting ‘Vision 2030’ of the tyro Crown Prince Mohammed bin Salman, a glorified McKinsey report setting out a new non-oil-dependent utopia for his people[11.  For a longer, skeptical discussion, of Vision 2030 see Michael Burleigh, The Best of Times, The Worst of Times: A History of Now, London, 2017 chapter 2. See also Simon Kerr, ‘Saudi Arabia redrafts crown prince’s transformation plan’, Financial Times, 7 September 2017].

Most of the MENA states are pondering how to diversify their economies away from hydrocarbons and into manufacturing, armaments, finance, pharmaceuticals, renewables, technology and tourism, while downsizing their bloated public sectors and abruptly phasing out the foreign remittance men and women who do most of the work. This in turn will hurt places like Egypt, Bangladesh, Pakistan and the Philippines.

This transition could be politically explosive, not least for Mohammed bin Salman, who is antagonising conservative Saudis (not to mention other princes who lost out in recent succession struggles in which he elbowed his own uncle aside). It will get worse if westerners (and the Chinese) opt for electric vehicles in large numbers, while asking themselves why they should care about sybaritic Emirati, Qatari and Saudi autocrats driving Maseratis in Mayfair.

Stones and oil

In his dotage, Sheikh Yamani went on to be a prophet, predicting in 2000 that the ‘oil age’ would finish, famously opining:[12.  Mary Fagan, ‘Sheikh Yamani predicts price crash as age of oil ends’, The Daily Telegraph, 25 June 2000.]

“The Stone Age came to an end not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.”

If today’s adaptation by the West is permanent, and demand destruction continues, this time it will be the Middle Eastern extractors that will need to adapt.