August 15, 2023 | Podcast
The Age of Oil

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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.

Comments are edited excerpts from our podcast, which you can listen to in full below.


Energy feeds into economic independence, which feeds into political independence, which influences the stability and strength of democracies. Is that a fair summary of your book?

Helen Thompson: I wanted to tell a history of the 2010s, with a key focus on energy, because understanding the politics of energy is important to the United States’ domestic politics; it’s also part of the story of democratic politics in Europe.

And while there are other things pertinent to the disruptions of the 2010s, we can’t understand the present geopolitical and economic world without understanding how fossil fuel energy affected the 20th century, as well as how fossil fuels are impacting the energy transition in the 21st century.

In your book, you talk about how the Suez Crisis was a seminal historical moment, but for different reasons than you thought.

Helen: In the first part of the 20th century, all major European powers tried to deal with their dependence on foreign oil. But they all failed, albeit in different ways.

Post-World War II, the United States didn’t want to return to exporting oil to Western European countries, or to have those countries import oil from the Soviet Union.

That meant Western Europe was left to import oil from the Middle East.

But the United States also had no intention of using its military power to be the guarantor of Western European oil security in the Middle East, a role that was ultimately left to Great Britain.

In the Suez Crisis, Great Britain then decided that Egypt’s nationalization of the company that owned the Suez Canal was a threat to Western European energy security. Israel, with secret support from France and Britain, launched an invasion of the Sinai Peninsula.

Because of this, President Eisenhower had to juggle a particular problem. He didn’t want the United States lined up against Great Britain’s nationalism (especially when he was running for reelection), but he also didn’t want to damage relations with Britain. Ultimately, the United States opposed the invasion of the Suez Canal, and Britain, France, and Israel were forced to withdraw.

This was a seismic shot, not just at Britain, but at France and West Germany, too. And from that point, Western European governments all said, “We need to do something different about energy security.”

This spurred the turn towards oil from the Soviet Union, which we now know turned into a much deeper energy relationship.

So, the Suez Crisis was pivotal to energy’s geopolitical role. Western Europe had to think differently after it realized that the United States was willing to exercise a veto over how it could deal with an energy security problem.

What are the global implications of U.S. oil production?

Helen: The United States’ foreign policy changed significantly in the 1970s. The Middle East was important in ways it wasn’t before. By the end of the decade, the Carter Doctrine, which tied American security interest to the Middle East, and the Persian Gulf in particular, was in place.

This came about because pre-shale U.S. domestic oil production peaked in 1970, and the United States was on a sharp trajectory to becoming the world’s largest oil importer. But after shale, the United States saw significantly higher domestic production and had the capacity to export oil.

How these two stories play out—what’s left of the U.S. shale boom, plus the speed with which the world can transition away from oil in transportation—is going to be geopolitically crucial.

The United States also saw a domestic gas boom, which stopped its need to import gas from abroad but impacted its ability to project power in the world.

The U.S. gas boom had a profound impact on Russia, which dominated the European gas market. The desire to buy gas from the United States rather than Russia matched preexisting geopolitical fault lines in the European Union.

In Poland, liquefied natural gas from the United States was viewed as a sovereignty lifeline. But Germany believed there was no reason to move away from a supply of cheap Russian gas.

The U.S. gas boom ultimately changed Europe’s energy options and allowed the United States once again to put significant pressure on European countries regarding energy.

Some argue that as the United States becomes increasingly energy self-sufficient, it will stop policing the world. But is the United States retreating from that role as quickly as we thought?

Helen: How this question plays out over the next decade is important. I think there is a sharp distinction between gas and oil, but the United States likely won’t go back to any kind of significant gas dependency. It looks like the shale gas boom will last longer than the shale oil boom, as the trajectory for shale oil is already causing the United States some problems.

While the shale oil boom isn’t over, it’s become concentrated in the Permian Basin, and some of the earlier big plays aren’t going to come back to beyond peak.

In addition, since at least 2019, the United States has basically badgered the Organization of the Petroleum Exporting Countries (OPEC) Plus, and tensions between the United States and Saudi Arabia regarding oil production are high of late.

A lot also hinges on how rapid the energy transition is, not in terms of decarbonizing electricity, but in terms of replacing oil in transportation and petrol chemicals.

How these two stories play out—what’s left of the U.S. shale boom, plus the speed with which the world can transition away from oil in transportation—is going to be geopolitically crucial, especially once you consider that China has been building a geopolitical position in the Middle East.

After Europe quickly pivoted away from energy dependency on Russia, did people become optimistic that energy supply chains could be re-engineered?

Helen: There’s an optimistic answer and a pessimistic answer. The optimistic answer is that it was possible to reduce the demand for gas in Europe, but there was considerable inefficiency in the way in which gas was being used industrially. I think that’s partly what last year showed.

It’s encouraging because based on the raw numbers, a much greater economic hit would have been expected. What’s not encouraging is that the reason why European countries were able to adjust is that their demand for liquefied natural gas, and their ability to pay higher prices, basically shut a significant number of poorer Asian countries out of those liquid natural gas markets.

If there was a peak in U.S. power, it would have to have been in March 2020, where pretty much the entire world was dependent upon how the Fed reacted in that moment.

I don’t think Europeans should be boastful about their ability to detach from Russia because they pushed the reduction and demand onto others who were poorer, and the competition between European and Asian countries for liquid natural gas will continue.

One of the questions that we still don’t know the answer to is “How did Chinese leadership read that situation?” Because there was a significant falloff in Chinese demand for liquefied natural gas in 2022 compared to a large increase the previous year. Was China also shut out of those markets?

I think the jury may still be out. But I think there’s evidence that Chinese leadership is fearful about where this competition for liquefied natural gas imports has left China.

Are chips becoming geopolitically important?

Helen: Both the United States and China depend on Taiwan, over which they are in geopolitical conflict. If you just think about it in a territorial sense, that is the principle geopolitical fault line between the United States and China.

Both sides are trying to escape their dependency on Taiwan by creating a domestic semiconductor industry, but given the complexities that involves, they’re bound up with Taiwan. I don’t think that there’s any way of analyzing the state of the geopolitical situation between the United States and China without centralizing chips.

But I don’t think the question of oil goes away. China has a high maritime dependency upon oil. And the U.S. Navy could potentially blockade the import of oil to China in a time of war.

We still live in a dollar world.

I wouldn’t see it as a choice between living in a world where we spend our time thinking about technology and how that contributes to geopolitical tension versus living in an energy-driven world. We’re living in both, and they interact with each other. Understanding this interaction is crucial to being able to understand our current geopolitical moment.

If the United States has better access to technology than China, does this give the United States an ongoing economic advantage that enables it to retain a higher share of global GDP? Is that a bullish, pro-American economic power thesis?

Helen: There are many economic areas in which the United States’ power shouldn’t be underestimated and China’s power shouldn’t be overestimated. The United States is more financially powerful because of the dominance of the U.S. dollar and the United States’ access to dollar swaps.

The United States is much less vulnerable as an energy-importing state than it was 20 years ago. While China has made progress around the energy transition, it can’t escape its technology problem. And this is where the energy question and the chip question come back together again, particularly where electric vehicles are concerned.

If you combine the United States’ strengths and China’s weaknesses, we are still living in a world in which the balance of advantages lies with the United States, not with China. And if the United States succeeds over the next decade in what the Biden administration hopes to get out of the Inflation Reduction Act, then it’s not implausible to see a world in which U.S. power gets stronger and China weakens.

During COVID-19, the U.S. Federal Reserve (Fed) acted as the world’s central bank. Is that a good situation for the United States to be in? Does the United States want its currency to have that power?

Helen: If there was a peak in U.S. power, it would have to have been in March 2020, where pretty much the entire world was dependent upon how the Fed reacted in that moment. And if a similar financial crisis occurred again, I think the same thing would happen.

But I don’t think the world financial system, and the way in which international banking works, has changed radically in the last couple of years.

The desire for countries that don’t have good relations with the United States to not be caught trading with each other in U.S. dollars is understandable. But the Chinese have been trying to deal with that problem for probably 15 years now; it still doesn’t have a currency that is convertible on the capital account. The desire to escape the U.S. dollar has been intensified by the sanctions that were put on Russia, but I’m not sure the capacity has been strengthened by that.

Even if we lived in a world in which climate change wasn’t happening, we would still need to transition to different energy sources because oil isn’t cheaply available anymore, at least for Western countries.

For example, the permanence of the U.S. dollar in a world that’s been recently shaped by Russia’s war and the transit payments that Russia still makes to Ukraine are in dollars. We still live in a dollar world.

If we’re moving to a world of China/Russia/OPEC Plus, then that’s a commodity block. On the opposite side, there’s Europe, Japan, Australia, and others. What’s in that center? It’s U.S. power. And what’s the center of U.S. power? I think U.S. financial power.

It’s revealing that the first significant moves the United States made against Russia after the invasion of Ukraine were financial sanctions. While the sanctions haven’t had the impact the United States would have hoped in terms of changing Russian behavior, they were still a big shot to President Vladimir Putin. They also caused considerable fear in China.

Is the age of oil coming to an end?

Helen: The fossil fuel energy regime, particularly regarding oil, is independent of the energy transition and the climate change questions. Even if we lived in a world in which climate change wasn’t happening, we would still need to transition to different energy sources because oil isn’t cheaply available anymore, at least for Western countries.

I think the age of cheap oil came to an end around 2005 due to rising Asian energy consumption and the stagnation of oil production (minus shale and tar sands).

If there’s rapid progress made on the transition to different energy sources, then this is a temporary problem. However, if the world plans to use 90 to 100 million barrels of oil per day over the next decade, with no substitution, then we’ll run into problems.

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