FEATURING:

Helen Thompson
Author and Professor, Cambridge University

39
The Age of Oil

June 26, 2023 | 49:03

We can’t understand current geopolitical events without understanding how fossil fuels shaped the 20th century. In this episode of The Active Share, Hugo sits down with Helen Thompson, a professor of political economy at Cambridge University and author of Disorder: Hard Times in the 21st Century, for a conversation about energy—how U.S. shale production created fault lines through the Middle East, Western Europe, and Russia; how decarbonization could drive further change; and how other industries (such as semiconductors) are having a similarly disruptive effect.

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Hugo Scott-Gall, Partner
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SHOW NOTES
00:36 Host Hugo Scott Gall introduces today’s guest, Helen Thompson.
01:32 The importance of understanding the politics of energy.
03:58 The history of reliance on foreign oils.
09:31 The drastic changes in American foreign policy.
14:23 The distinction between gas and oil and the possibility for conflict in the reliance on the Middle East.
22:38 How political dependence may change in a world with abundant energy.
29:12 How to slow the increase in the potency of Chinese military power and the significance of intellectual property.
35:55 Does the U.S. have an economic advantage over China for their technology accessibility?
38:03 The possible consequences of the Russian sanctions.
42:50 The key drivers for the current energy transition.
Transcript
Hugo Scott-Gall: Today I am delighted to have with me, Helen Thompson. Helen is a professor of political economy in the Department of Politics and International Studies at Cambridge University. Her present work centers on the geopolitics, political economy, and domestic politics of energy.

Her most recent book, Disorder: Hard Times in the 21st Century, was published last year and was short-listed for the 2022 Financial Times Business Book of the Year. She has written for, among other outlets: The Financial Times, The New York Times, Sunday Times, The Guardian, as well as Foreign Affairs, Project Syndicate, The London Review of Books, The New Statesman, and Nature and Prospect. Helen, thank you very much for coming on the show.

Helen Thompson: It’s a pleasure to be here, Hugo.

Hugo Scott-Gall: So, I thought where we’d start, the sort of setup for what I wanted to talk about, really, is the overlapping themes of your book, which you call, Disorder. So, you could argue maybe it’s a bit gloomy, but I think we might end on a more optimistic note. But I really see the setup as you argue that energy—who has energy, who needs energy. So, the surpluses and deficits of energy are central to, really, the economic history of the 20th century and indeed the current period we are living in.

So, you think about surpluses and deficits of energy, the same for capital. And that feeds into economic independence or the lack thereof, which feeds into political independence or the lack thereof, which clearly then influences the stability and strength of democracies. Is that a fair summary? Have I understood what is an excellent, quite complex book well?

Helen Thompson: Yeah. I basically wanted to tell a history, a long history, of the 2010s as a decade and make energy pivotal to that. And in doing so, I thought it was important to tell a story about the geopolitics of the 20th century right from the beginning of it, from the time when what I would call the Age of Oil began. Then from the 1970s, economically—because we can see very clearly, there in that decade, I think, the way in which energy crises and monetary problems came together.

And then a history of democracies where, I would say, that I’m not making such a strong argument about the explanatory power of energy. I think that understanding the politics of energy is very important in relation to the United States, its domestic politics. But I think that while problems generated by the economics and geopolitics of energy consumption are a part of the story of democratic politics in European states, they’re only one part of it.

And there are other things that I think were pertinent to the disruptions of the 2010s that were going on then. But my big organizing idea is indeed that we can’t understand the present geopolitical economic and political world without understanding the deep effects that fossil fuel energy had on the 20th century. And that the energy transition in conjunction with the ongoing problems that fossil fuel energy generated having on the 21st century.

Hugo Scott-Gall: Right. Right. Well, I’m going to give myself a pass. I think I mostly understood it. So, can we start on energy? In your book you focus on the Suez Crisis as being a more seminal important moment for different reasons than perhaps you thought. This wasn’t necessarily about the final denouement for British imperial power. It was much more about where Europe would get its energy from and the U.S.’s role in that. Could you talk a bit about why you think that’s so important?

Helen Thompson: I think in order to see this, we need to understand that all the major European powers in the first part of the 20th century, in ways I would suggest were fairly catastrophic, tried to deal with the fact that they were dependent upon foreign oil, including obviously oil from the United States, indeed, primarily oil from the United States, or at least for the Western Hemisphere. They tried to deal with that problem and they all failed. And they failed in different ways. Germany obviously went down a very catastrophic road under the Nazis.

But the British and the French were not able to turn their empires into empires that could solve their energy problems. Britain though kind of hung on in there through the Second World War in the Middle East. They still had a position in the sense that the Anglo Iranian Oil Company, as it was, which was 50%-plus or 51% owned by the British state, was still operating in the Middle East. It was one of the Seven Sisters of the International Oil Companies. The British still had a military position in the Middle East, indeed, some effectively colonies and principalities.

And because the Americans in the post-war world from 1945 did not want the European states to go back to importing oil from the Western Hemisphere, or really to import it from the Soviet Union, albeit the Soviets had a reduced export capacity in the immediate years after the Second World War. That meant West European countries importing oil from the Middle East. And the United States had no intention of using its military power in the post-war world to be the military guarantor of West European oil security in the Middle East.

That role was left to Britain. And it was knowingly left to Britain by the United States as well as by the British themselves. So, whatever else was true about the ongoing British imperial position in the Middle East, it was in some sense a feature of the way in which the NATO states dealt with West European energy security in the first decades of the Cold War. So, when the British behaved as they did at Suez in saying that NASA’s nationalization of the company that owned the Suez Canal was a threat to West European energy security.

The British were doing what they were supposed to be doing, if you like, in the NATO division of power in the first decade of the Cold War. But Eisenhower was always juggling another problem, which was he didn’t want Washington lined up against our nationalism. And he certainly didn’t want that at a time when he was running for reelection. So, when the Suez Crisis came, the British did what they thought was their role, and they performed that role, and the Americans used their financial power to say, no, you don’t. Now that was, then, a huge seismic shot, not just in Britain, but in France, obviously, because France had been party to the military action too.

But also in West Germany. I mean, Konrad Adenauer, the West German chancellor, said that it served as a violation of European reason of state in what the Americans had done. And what you can see from that point is that the West European governance in different ways—in part collectively and in part not collectively—all said, “We need to do something different about energy security.”

So, on the one hand, we see the turn towards Soviet oil and that, in time, into the ’70s, is going to turn into a much deeper energy relationship. Not just oil, but gas too, because gas was starting to grow in significance for European countries at this point. But also a much sharper turn to nuclear power than had previously been the case before. And so, Suez is a point of departure because West European states can’t think Middle Eastern oil is going to take care of our energy problems for the foreseeable future. They had to think in different ways because they’d realized that the Americans were willing to exercise a veto of what West European states could do to deal with their energy security problem.

Hugo Scott-Gall: So, if the most important foreign policy of any country in the 20th century was the U.S., that was pretty correlated with how secure or insecure the U.S. felt about its own energy supply. Would you agree that that’s a fair statement? And the second part of that is, when the U.S. becomes more energy secure, which shale allowed it to in this century, Europe usually pivots in some way east towards Russia. Is that a fair summary of the importance of U.S. oil production driving foreign policy, which has global implications particularly in Europe, which is short oil in a big way? But also, China.

Helen Thompson: Yeah. I think the gist of that is correct. I mean, I think that we could certainly see that American foreign policy changes quite significantly in the 1970s. The Middle East has an importance that it has not had before. It’s not that the Americans have not been interested in the Middle East. They have. But by the end of the decade, they have, for the first time, got a national security doctrine that ties American security interest to the Middle East and the Persian Gulf in particular. The Carter Doctrine. And if we then say, well, why did that turn came about?

It came about because pre-shale U.S. domestic oil production peaked in 1970. And the U.S. thereafter in the ’70s was on a pretty sharp, rapid trajectory to becoming the world’s largest oil importer. Something that still was until 2017 when China replaced it. So, a world in which the United States was in part dependent upon oil imports from the Middle East was geopolitically a different world than when the United States was largely domestically self-sufficient in oil.

I think, then, if we turn to shale, if we think about it from the American position, we can see that a world then in which the United States went back to, not complete self-sufficiency oil. In fact anywhere real near self-sufficiency on oil. But significantly higher domestic production. And with capacity to export oil and had a domestic gas boon that meant that the period in which the United States had been importing gas from abroad came to an end. So, now the United States really is domestically self-sufficient in gas.

But that had a profound impact on both the ability of the United States to project power in the world, not least in relation to the Middle East, in which it was now less energy dependent. But it also had this profound impact on the state, Russia, that had dominated pretty much entirely the European gas market because now Russia had a competitor for those gas markets in the United States. And that the desire to buy gas from the United States rather than from Russia sort of matched preexisting geopolitical fault lines in the European Union about the relationship with Russia.

So, if we just put it very schematically, in Warsaw, the view was the prospect of liquid natural gas from the United States was a sovereignty lifeline. In Berlin, the view was absolutely no reason to change from the status quo of pipeline supply of cheap gas from Russia. So, it wasn’t just that the nature of the American power changed on the energy side because it became a greater ability to use energy for geopolitical purposes and to rethink existing geopolitical tensions, particularly in the Middle East.

It was, it changed the options that European states had allowed ultimately the United States to put significantly more pressure on European states about energy again. So, if we go back to that Suez story and say that that was a period in which the Europeans tried, or the West Europeans I should say, tried to assert some autonomy against the United States having had such a restriction on their autonomy placed at Suez.

I think we can see, then, the period from the ’70s through to, one could argue whether it’s, like, the middle of the 2010s or all the way through to Russia’s war, in which Europeans and Germany, in particular, had gathered to themselves considerable autonomy from American pressure on their energy policy. That period, then, came to an end. And part of that story is obviously about the way that Russia behaved. But it’s also about the ability of the United States, in some sense, to discipline European powers where energy is concerned through shale.

Hugo Scott-Gall: So, I’ve got two questions coming off that. But I don’t want to ask them both at once because it’s too much. But the first is, there’s certainly an argument now that the U.S. is increasingly self-sufficient, not just in energy but in lots of things. The U.S. is a lucky country in that sense. And therefore it doesn’t need to police the world. And that policing really comes in the form of the U.S. Navy. So, that changes the established order and someone else or others will have to step in to make the world safe.

Certainly if you are an importer of things and certainly if you’re an exporter of things. And it shifts. You start getting more regional powers than maybe you had. Is that a view you subscribe to? Because if you say the transition to renewables, alternative forms of energy, just takes longer. And we know there are impediments, such as storage. If that takes longer and U.S. shale is close to peaking, and that’s maybe a dangerous assumption to make, to bet against the engineers. That actually the U.S. can’t get more productive.

But if the U.S. sees it’s beginning to import a bit more energy, now obviously the U.S. is a great place to have renewables. It’s sunny and it’s windy. So, again, the U.S. is lucky there. But if that takes longer, might this idea that the U.S. really is retreating so much from the world be wrong? Because it’s going to have to hang around a bit longer because it does have a small but growing external energy dependency.

Helen Thompson: I think the way that this question plays out over the next decade is pretty important. I think that what is true already, or what is clear already, I should put it that way, is there is a sharp distinction between gas and oil in this respect, is, it doesn’t look like the United States is going to be going back to any kind of significant dependency upon gas. The United States, it is, I think, genuinely self-sufficient in that area. It looks like the shale gas boom will last longer by sometime than the shale oil boom. I think we can see already that the shale oil trajectory is causing the Americans some problems.

And that isn’t because the shale oil boom is over. Clearly that isn’t the case. But it’s become quite concentrated in the Permian Basin, if you look at where the growth is coming from. And a couple of the earlier big plays, perhaps particularly Eagle Ford, are not going to come back to beyond peak. And I think if we then look at the fact that really since at least 2019 (you might argue a little bit 2018) that American presidents, whether it be Trump or whether it be Biden…have basically badgered OPEC Plus. And going at it through the Saudis to increase oil production.

Suggested there is an awareness that the United States is back in a world in which it’s not like it was in the 2000s for the U.S. But it’s not like it was in the middle of the 2010s either. And that at the moment the core of the U.S. oil dependency, such as it is, is met from Canada. And it’s not usually going back into the Middle East for imports. But there’s a question I think about how long the tar sands boom lasts in Canada too. There’s a question about how far, wherever the United States gets its oil from, whether that’s domestically or from Canada, how far those prices can really be unaffected by the price setting of OPEC Plus.

So, I think that the path out of the Middle East, so to speak, that the Obama administration, I think, thought was there, I’m not so sure is there. And then a lot turns, as you suggested, Hugo, on how rapid the energy transition is, not in terms of decarbonizing electricity, really, but in terms of actually replacing oil in transportation and petrol chemicals. And that, I think, is where there’s not so obvious grounds for optimism. And that the time scales though of how these two stories play out, what’s left of the U.S. shale boom, plus the speed with which we are able to transition away from oil in transportation in particular is going to be crucial I think geopolitically.

Particularly, once you add in the fact that China has been rather entrenching its position in the Middle East, at least geopolitically. Think of the 25-year agreement that it struck with Iran a couple of years ago, effectively building up a position via Iran on the Strait of Hormuz, doing joint military actions with the Russians and the Iranians around those waters. And because China doesn’t want to get trapped into an oil dependency that is too acute on Russia, which in a way has been the effect of Russia’s war in terms of saying, okay, European countries are not going to be buying so much Russian oil, or at least not crude.

They might still be buying refined products from India. China and India buy more Russian crude. Europeans buy more crude from the Middle East. But China wants diversity of energy supply. That’s crucial to the whole Chinese leadership’s view of energy security. So, it’s not, I think, just going to say, okay, we’ll back out of the Middle East. Quite the contrary. So long as you have the United States still engaged with the Middle East because the demand for oil will be sufficiently high for it, that it can’t disengage.

And China is still engaged and the European countries have become back to being more dependent upon the Middle East. Then I think you’ve got quite a set of geopolitical factors and geopolitical risks around the Middle East again.

Hugo Scott-Gall: Yeah. It does get more geopolitically challenging. And I guess, as you say, what China is doing is similar to what the U.S. has done before, when the U.S. were more dependent on the Middle East. It was more involved with the Middle East to manage its security and supply. So, I guess what China is doing is pretty rational, you would’ve thought. You started talking on the energy transition.

I don’t know if you would’ve thought that it’s a, I think, certainly consensus would not have expected, say, three or four years ago, that Europe could pivot so quickly and effectively with some luck on gas prices, away from dependency on Russia. Does that give cause for optimism that actually you can re-engineer supply chains of energy? Or is it more Europe pivoted away? That was successful because the U.S. was available to supply because North Asia was still locked down and quite weak demand.

So, should we not infer from that, too much optimism, in terms of you can’t actually reduce dependency quite quickly? And secondarily, to play this forward, we can debate how quickly energy transition happens away from fossil fuels. And certainly in Europe, someone like Germany, focus on renewables a lot, but it’s not particularly conducive to renewables. It’s not particularly windy and it’s not particularly sunny. At least the UK has wind. But if you play it forward, eventually energy flows are going to change and geopolitical power derived from energy is going to change in a world where we have more abundant energy.

And you could argue, you could be very utopian, and say, once we really can store energy and, sure, it’s a big challenge, but you can do more and more each year. The world really could look quite different. We can get into the whole behavioral aspects of what does abundant energy mean for a modern economy? But certainly geopolitically these dependencies surely begin to shift.

Helen Thompson: On the first question, I think that there’s an optimistic answer and a pessimistic answer. I think the optimistic answer is that it was possible, I think, to reduce the actual demand for gas in Europe. I think some of the significant reduction in industrial demand for gas may still play out in terms of higher food prices this year. But because of the absence of using gas for fertilizers and the consequences that that had for poorer countries in the world in fertilizer markets.

But I think that there were clearly energy efficiencies. I’ll put it the other way around, there was considerable energy inefficiency in the way in which gas was industrially being used in Europe. I think that’s partly what last year showed. And that’s encouraging because if you just looked at the raw numbers in terms of the reduction of industrial gas consumption, you would’ve expected a much greater economic hit than what there was.

I think what’s not so encouraging is the reality that the reason why European countries were able to adjust in the way in which they did was that their demand for liquid natural gas, and their ability to pay higher prices, basically shut out a significant number of poorer Asian countries out of those liquid natural gas markets. And most spectacularly, Pakistan, where it was profitable for the L&G companies to break the long-term contracts that Pakistan had, pay the penalties, and sell to European companies in the spot market.

So, I don’t think we as Europeans should be very complacent or boastful about our ability to detach from Russia in this respect because we really pushed the reduction and demand onto others who were poorer than we are. And I think that this competition, essentially between European countries and Asian countries for liquid natural gas is going to go on. I think one of the questions that we still don’t quite know the answer to, is how is the Chinese leadership reading that?

Because there was quite a significant falloff in Chinese demand for liquid natural gas in 2022 compared to a very large increase the previous year. Was it the case that’s entirely explained by China’s weak economic performance in 2022? Was China also in part shut out of those markets? Was it the case that the Chinese leadership feared that they were being shut out? And so, move to try to increase domestic gas capacity or switch to coal, where the generation of electricity is concerned. I think the jury may be still out. But I think there’s beginning to be evidence that the Chinese leadership is a bit fearful about where this competition for liquid natural gas imports has left China.

In terms of the future, I think it’s clearly the case that if you manage to decarbonize electricity leaving the nuclear question out of it for the moment, and then to electrify where oil was doing the work before, and also electrify in terms of heat pumps replacing gas in heating, you are taking out of the picture the direct geopolitics of energy. Because you are not finding the sun or the wind in another part of the world and literally extracting it and bringing it to your country. It’s a completely different dynamic than that.

We’re using the sun and the wind for electricity from where we are. We’re not going off in search of it. And that is, I think, really fundamentally different. I think though that once we factor in our ability to use the sun’s and wind’s energy is dependent upon metal extraction. And then we think about the arbitrary distribution of metals around the Earth and the fact that China already is dominant in their production of some of those metals or the extraction of those metals.

But certainly in the supply chains around and processing of rather more of them. That means that the geopolitics of energy comes back in that form. It’s indirect rather than direct because we’re not got to, as I said, explore and extract energy itself. But in order to use the energy that we are going to use, we need to extract metals and minerals from under the Earth. And that already has a geopolitics to it.

And then I think when it comes to Europe, the European countries are all pretty much going to have some of the same difficulties in this geopolitical age that’s coming as they’ve had in the age of oil and gas because none of the European countries are particularly well-endowed with these metals. And to the extent that there are some of them that are important in some European countries is considerable domestic political resistance for environmental reasons to the extraction of metals, to mining metals.

So, I think that the geopolitics will be different, and it may well be that it’s more about the supply chains around the extraction and processing than it is about the actual extraction. But there will be geopolitics in the extraction of metals. As I said, I think that we can already see that in terms of China’s dominance of that, and the fact that the fear of China’s dominance has induced so much almost panic in Washington and commitment to try to give the United States a domestic mineral base in order to compete with China in the energy future.

Hugo Scott-Gall: So, my next question leads on from that, which is really around technology. So, previously on the podcast, we’ve had Chris Miller, who wrote Chip Wars. And I think that’s very front-and-center, that if my moral, utopian, optimistic view is that energy reduces, which isn’t to say it goes away, reduces from its current importance to geopolitics, surely very high-end intellectual property, which manifests now in the best chips in the world that the U.S. is trying to restrict Chinese access to.

One of the things that Chris Miller says in his book is that the U.S. had an epiphany in the Vietnam War. The missiles were inaccurate. Why weren’t they accurate? Because the tech wasn’t good enough. So, we need to have better chips. We need to have better semiconductors. So, how do you slow the increase and potency of Chinese military power, restrict access to chips?

Are chips becoming geopolitically important? Or certainly of a similar geopolitical importance to energy? How do you think about really high-end intellectual property, specifically around chips? And that is an increasing source of geopolitical power. Does that enter into your equation, into your mix?

Helen Thompson: Yeah. I mean, I think that if I decided to spend more time on the geopolitics of East Asia itself, then I absolutely would’ve made the semiconductor issue quite pivotal to that. I decided for a set of reasons really to leave out the geopolitics of East Asia outside the context of what was happening to American power, more generally in China’s ascendancy in the 21st century. Not because I didn’t think it was important, but because I wanted to make sure that the three parts of my book, reasonably at least, aligned with each other.

And as I didn’t intend to talk about the domestic politics of any East Asian country or the domestic economies of any East Asian country. I left that side of it also out of the geopolitics while trying to draw out the parts of it that I thought was significant for the overall story that I did want to tell. I think that it’s quite hard to think that there’s a really direct parallel between an energy geopolitics and the chip issue as it plays out at the moment because Taiwan is obviously absolutely pivotal to that.

And the really interesting and terrifying thing there in one sense, to be put quite simply, which is that both the United States and China have a dependency on an island, over which they are in geopolitical conflict over. And in fact, if you just think about it in a territorial sense as opposed to the other ways in which geopolitical conflict manifests themselves, that is the principle geopolitical fault line between the U.S. and China.

And it happens to be the place that both sides are very economically dependent upon. Both sides are trying to escape their dependency on Taiwan by creating essentially a domestic semiconductor industry. But given the complexities that that involves in the supply chain, they’re bound up with the Taiwan manufacturing company. Again, that’s much easier said than done. So, I don’t think that there’s any way of analyzing the state of the geopolitical situation between the U.S. and China without making that pretty central to it.

I would also say though that I don’t think that that means that the oil question goes away. Quite the contrary. Because what it means is, as that issue is playing itself out over Taiwan, that China has a vulnerability that the United States doesn’t have, in that China has a high maritime oil dependency upon oil. And the United States Navy has got the ability to blockade the import of oil to China at a time of war if that is what is coming.

So, I wouldn’t see it as a kind of choice between, are we living in a world where we should really spend our time really thinking about technology and how that contributes to geopolitical tension versus are we still living in an energy-driven world? We’re living in both. And they interact with each other. And understanding the interaction, I think, is crucial to being able to understand well what the geopolitical moment we’re in is.

Hugo Scott-Gall: And I think you did mention, of course, that Taiwan is seismically unstable. It is built on a big fault line as well just to make it even more kind of surreal. But I guess part of my question was access to the very best technology is going to give you a better than even chance of driving productivity. So, if high-energy prices are sort of anti-productivity for those who have external energy dependencies, access to the best technology can give you a productivity boost, which is what you need with deteriorating demographics. All economies need productivity boosts. But certainly, Western economies do, given they have tougher demographics.

So, going back to the question again and saying, so, if the U.S. has better access to technology than China does, does this give the USA an ongoing economic advantage that enables it to retain a highest share of global GDP, best military? Its’ power will continue to have that correlation between the forefront of technology, feeding back into a more productive economy, which it is, versus China GDP per capita is way higher. Is that a sort of bullish, pro-American kind of economic power thesis?

Helen Thompson: No. I would say that actually there’s a whole set of economic areas where the United States’ power should really not be overestimated and China’s power, sorry, underestimated, and China’s power shouldn’t be overestimated. The United States is more powerful, I think, financially in terms of the dominance of the dollar and the ability of the United States to use access to dollar swaps to exercise power. I’m not saying that’s it ever been but certainly than it was 20 years ago.

The United States is much less vulnerable as an energy-importing state than it was 20 years ago. I think that it’s certainly true that China has made progress in certain economical areas around the energy transition, including electric vehicles on another level to the U.S. so far. But China can’t escape this tech problem around the successes that it does have. And this is where I think that the energy question and the chip question come back together again, particularly obviously where electric vehicles are concerned.

So, I think if you put together the U.S. strengths and China’s weaknesses, we are still living in a world where the balance of advantages in these areas lie with the United States and they don’t lie with China. The only thing I think where we really would have to qualify that, as I say, is on the metals question, where I think China really is in a dominant position. But if the U.S. succeeds over the next decade in what the Biden administration hopes to get out of the Inflation Reduction Act, then I think that it’s not implausible to see a world in which American power gets stronger and stronger and China actually weakens.

Hugo Scott-Gall: That’s a pretty interesting conclusion. I think to kind of get to, not necessarily a conclusion, but certainly a scenario. One of the things I wanted to ask you about, my list of things to ask you about is very long. I’m not going to get through them all. Don’t worry.

But there is an argument that actually we’re seeing peak U.S. financial power that the sanctions applied to Russia may turn out to have some negative unintended consequences, which is the push to de-dollarize, why should Country A buying goods or services from Country B, neither of whom in the U.S. have to settle in dollars? Obviously that’s most pertinent in commodities. So, was the 2008 crisis the blow off for peak U.S. financial power? The move to de-dollarize digital currencies?

And I guess the kind of ongoing dependence on the dollar that really manifests in shortages and financial crises. And we saw it during COVID where the Fed acted as the world’s central bank room made available all sorts of financial contortions to make dollars available. Is that a good situation for the U.S. to be in? Does the U.S. necessarily want to have this power for its currency? And secondarily, is there sufficient movement in your view to de-dollarize and to reduce most countries’ external dependency on dollars?

Helen Thompson: I don’t think that the peak of U.S. power in this respect was like 2008. I think if there was a peak, and I’m not really yet convinced of that, but it would have to be in March 2020 as you said, where pretty much the entire world was dependent upon how the Fed reacted at that moment. And I would say that if we had a repetition of such a financial crisis, I think exactly the same thing would happen. I don’t think that the world financial system and the way in which international banking works has changed radically in the last couple of years, meaning that the dollar is less significant than it was.

I think the desire for countries who don’t have good relations with the United States, and obviously start with Russia and China, not to be caught in doing trade with each other in dollars is very understandable. But the Chinese have been trying to deal with that problem for probably 15 years now. They still don’t have a currency we know that is convertible fully on the capital account. I think that the desire for escaping the dollar has been intensified by the sanctions that were put on Russia but I’m not sure the capacity to escape the dollar has really been strengthened by that.

I mean, if you just want an example, it’s not a trivial example. But just showing the permanence of the dollar in a world that’s been shaped for the last year by Russia’s war and the transit payments that Russia still makes to Ukraine, you know, are done in dollars. We still live in a dollar world I think. And I think that that is the point that is very difficult for the challengers to the United States to get past.

If we’re moving to a world of kind of like a China/Russia/OPEC Plus look, then that’s the kind of commodity block. I mean, obviously it’s got a big commodity consumer in China. But I think that China is trying to make sure that it kind of gets close to as many OPEC Plus countries as possible. And then on the opposite side, we’ve got the . .and European countries and some others, Japan, Australia, that if you then say, like, what’s the center of that?

It’s U.S. power. And what’s the center of U.S. power? I think it is still U.S. financial power. And in that sense I think it’s revealing that the first significant move that the United States made against Russia after the invasion were financial sanctions. Now they haven’t had the impact that Washington would’ve hoped in terms of actually changing Russian behavior, but was that a pretty big shot to Putin? I think absolutely there’s no way he would’ve left, I think, 50% of Russia’s foreign exchange reserves outside Russia if he thought that the United States was capable of doing that.

And obviously it’s caused considerable fear in China. But I don’t see that they really have an alternative particular, actually in a way in China’s case, because of the way in which Chinese firms/Chinese banks, have become integrated into the world financial system.

Hugo Scott-Gall: Is what I’m about to describe a too rosy scenario in your view? That actually we’re on a wave, on the cusp of quite large productivity improvements from the ongoing big steps forward in computer power/computer processing that actually, you know, we’re bending more and more atoms so we’re seeing big advances in medicine. That we are going to have something of a productivity surge. AI will contribute to that, as long as you keep it reasonably tame. Living standards can go up. Maybe we have two spheres in the world, but can they actually peacefully coexist? We had the Cold War.

It was different of course but nevertheless there were no major conflagrations. And so, actually your book, which is called Disorder: Hard Times in the 21st Century, as we said, you might be a little bit too pessimistic that there’s enough good stuff going on and there are enough, I guess, constraints to Cold Wars becoming hot wars and you can be pretty innovative and increase living standards during Cold Wars. It doesn’t have to be bad news.

Helen Thompson: Yeah. I don’t dispute that you can increase living standards during Cold Wars. I think that the struggle is, it’s not the only one but I’m just going to concentrate on this one, is that the optimistic story relies on quite rapid technological innovation taking place where the energy transition itself is concerned. I think the bottom line though is, maybe it will, maybe it won’t. The bottom line there is actually epistemological uncertainty.

And that’s what makes this actually both a problem for governments in deciding policy and also in then handling the politics of it with their citizens very difficult because the amount of uncertainty is huge. And in that sense, it makes a big difference, whether significant technological breakthroughs on storage occur within five years, 10 years, 15 years. And I think the reason why it makes, I mean, that would make a big difference in itself.

But the reason why it makes such a big difference is because the fossil fuel energy regime, particularly in regard to oil, is in its own difficulties in my view independently of the energy transition and the climate change question. So, even if we lived in a world in which climate change wasn’t happening in the way in which it is and driving the energy transition, we would still need to be doing an energy transition because we have reached, I think, not quite the end, but towards the end of an era in which oil was relatively cheaply available at least for Western countries.

And that didn’t at least in the ’80s, ’90s, first part of the 2000s, caused too many military financial problems. But I think that age came to an end, that interlude between the ’70s and where we are now, came to an end around 2005. And it’s the product of the rising Asian energy consumption running into the stagnation of the production of oil, minus shale and tar sands. And so, if we make rapid progress on the energy transition, then this is just a kind of a relatively temporary problem that we’re going through. We can see that it’s caused certain economic difficulties over the last couple of decades.

But there’s light at the end of the tunnel, so to speak. But actually if over the next 10 years the world is still going to be using somewhere between 90 and 100 million barrels of oil a day, or 95 to 100 million barrels of oil a day, and we’re not substituting for oil quite rapidly, then there’s a problem.

Hugo Scott-Gall: Well, look, I think that’s as good a place as any to finish, Helen. I think there’s a lot more, my list of questions goes on to several pages. There’s a lot more I could’ve asked you but not for today. I think we covered a lot of ground. I want to thank you for taking the time. It’s been great to have you on the show and it has been an hour full of thoughtful insights for us to think about. So, thank you again. It’s been wonderful to have you on.

Helen Thompson: Oh. It’s been a great pleasure to talk to you, Hugo.

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Hugo Scott-Gall, Partner
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