The current period is really exposing what is wrong with the world order based on Capitalism. Those in the know have always understood that the system is not designed to advance human prosperity generally. At times in history, it has required the general improvement in material living standards to accomplish its aims – which are different from that improvement. So, it has tolerated a more equitable distribution of income and access to consumption purchasing power. But while the masses became complacement as they polished their big (oversized) SUVs, which sit in their driveways next to their big (oversized) motor boat and out the front of their big (oversized) house that is ill-designed for a carbon-neutral future, the bosses have been beavering away working out how to continue to meet their aims independent of us.
Current market conditions
The International Energy Agency (IEA) was established in 1974 “to help co-ordinate a collective response to major disruptions in the supply of oil.”
I regularly consult its data resources, which are of high quality.
In its most recent report – Oil 2021 (published March 2021) – the IEA notes that:
Global oil demand, still reeling from the effects of the pandemic, is unlikely to catch up with its pre-Covid trajectory. In 2020, the start of our forecast period, oil demand was nearly 9 mb/d below the level seen in 2019, and it is not expected to return to that level before 2023.
They provided this graph which shows their previous pre-pandemic forecasts of demand for oil and what has happened since.
What we conclude is that the the demand for oil is below where it would have been without the interruption from the pandemic and is not accelerating at a faster rate than the IEA predicted previously.
So when you read commentators claiming that the demand for oil is going ‘through the roof’ you have to wonder what planet they are on.
The problem is all supply related.
The question then is whether policy makers deliberately engineer a reduction in demand to match the supply shortfall in the knowledge that such a reduction would likely lead to recession with rising unemployment, massive income losses and disrupted capital formation (and reduced future growth potential).
That is what happened in the 1970s.
And it is what is behind the increased interest rates that everyone who won’t lose a job as a result is calling for.
Whether the rising interest rates reduce the price pressures is questionable. But they will almost certainly increase unemployment.
Which means that the policy shift isn’t very sensible in the current environment.
It doesn’t make any sense to starve someone on low income by cutting their income just because prices have risen and squeezed the income.
But the other question that should be asked is whether the current demand (which is below the pre-pandemic forecast) is above the potential supply levels?
Then, the demand has to be reduced.
The IEA is clear that this is not the case.
In their – Oil Market Report – March 2022 – the IEA note that:
The prospect of large-scale disruptions to Russian oil production is threatening to create a global oil supply shock …
But we also read that:
The OPEC+ alliance agreed on 2 March to stick with a modest, scheduled output rise of 400 kb/d for April, insisting no supply shortage exists. Saudi Arabia and the UAE – the only producers with substantial spare capacity – are, so far, showing no willingness to tap into their reserves.
At present, global oil stocks are filling the gap but they are “depleting rapidly”.
The point is that the interest rate/fiscal austerity camp’s perspective is based on an excess demand situation and want to undermine economic growth.
But it is clear that the current oil price hikes are due to a reluctance of Saudi and UAE producers to reduce their “substantial spare capacity”.
That is what we call an abuse of market power and causing a recession does not address that.
On March 18, 2022, the IEA released a – 10-Point Plan to Cut Oil Use – which is summarised in this graphic:
Some of these choices are at the volition of all of us but most require strong government legislation and enforced regulation for them to become operational.
Government could start by declaring all public transport is free to all from now on (Covid notwithstanding).
They could announce that all their public servants can continue to work from home indefinitely.
They could force reduced speed limits on highways.
They could provide substantial subsidies for EV uptake (in the same vein as the solar panel incentives that have been spectacularly successful when implemented).
They could force local authorities to create bike only roads.
These will not only ease the energy price squeeze in the short-run, but, also, will help us transition to a greener, carbon-neutral future.
I don’t see much action from governments in this direction as yet.
Moreover, using policies that aim to cut spending do not address the market power issue, which is endemic in Capitalism – and defines the ambitions of Capital – to achieve high rates of anti-competitive concentration and price setting power to extract as much profit as possible.
Everything else is secondary for owners of capital in this sort of system, which is why it fails to deliver on societal needs.
The Capitalist system was never designed to satisfy societal needs.
That is not its logic.
And it is why we should heavily regulate it on the way to transitioning away from it.
Which brings me to the problem of Capitalism
More than a decade ago, I wrote this blog post – L’horreur economique (January 30, 2010) – where I reviewed a disturbing book written by the French writer Viviane Forrester.
In her 1996 book called – L’horreur Economique – about unemployment (you can get the 1999 English version – HERE – essential reading) – she proposed that governments are failing to generate enough employment but at the same time they are promoting a backlash against those who are jobless.
Viviane Forrester wrote:
The panaceas of work-experience and re-training often do nothing more than reinforce the fact that there is no real role for the unemployed. They come to realize that there is something worse than being exploited, and that is not even to be exploitable …
The book ventures into the notion that governments (elected by us) have made the unemployment dispensable to ‘capitalist production and profit’ and have instead been content to keep them alive. But soon, why would it not be implausible to declare this growing group of disadvantaged citizens totally irrelevant.
We allow our neoliberal governments to claim there is not enough ‘money’ to solve all these problems.
But if the unemployed and homeless are ultimately dispensable for capitalist production (and that is what persistent long-term unemployment suggests); and they cannot do anything productive if we employ them in the public sector (that is the overwhelming view of the mainstream); and they are a nuisance to manage (you know all the arguments – income support corrupts etc) – then ultimately society might start asking “what is the point of the unemployed?”.
That is the disturbing question that Viviane Forester poses.
She postulates that then different solutions might be advanced such as getting rid of them altogether. Don’t think this is off the track … after all only 70 odd years ago Germany decided that a definable cohort was dispensable and could be exterminated.
L’horreur Economique is one of those books that you just go back to from time to time to remind yourself of the message.
I thought about it when I read the financial news that Shell made £14 billion in profits last year (2021) and paid its CEO Ben van Beurden £6.2 million in wages – a 26 per cent pay rise on the year.
Then I read that BP made £9.2 billion in profits and paid its boss £4.5 million – a rise of more than 50 per cent on the previous year.
Recently, the BP boss boasted that:
When the market is strong, when oil prices are strong and when gas prices are strong, this is literally a cash machine.
That is the sort of hubris that we are accustomed to hearing from the top-end-of-town.
A few weeks ago a financial funds manager in Sydney said that greed was the best approach for his firm in the way of the the massive and destructive flooding in NSW recently because during these calamities people are scared and vulnerable.
The inflationary pressures are particularly burdensome for low income individuals and their families because they have less discretionary spending relative to their income.
Higher income earners have more room to adjust to the real income loss (purchasing power loss) that rising inflation creates.
But low-income earners have little scope to make those adjustments and as a result get into financial trouble quickly – falling behind in utility bills, rents etc.
It is clear that wages growth for workers is not occuring at any rapid rate (and is not driving the inflationary pressures).
Below, I report on the state of the oil market and options facing government.
But the existence of market concentration allows companies like BP to become ‘cash machines’.
Economists have this notion of a ‘normal profit’, which is an opportunity cost concept.
Accordingly, a firm earning a ‘normal profit’ is earning just as much as is required to keep their capital in that use. Any profits above that level are supernormal and can be taxed away without any distortion to resource allocation.
Note that the definition and conclusion is not Modern Monetary Theory (MMT). Rather, it is basic neoclassical micro theory.
What does it mean in this instance?
Well the ‘cash machine’ profits that the energy companies are making reflect their price setting power in the market and the ability of suppliers to restrict supply and create ‘excess demand’ situations in order to push up prices.
But to characterise the problem as ‘excess demand’ is a inane as saying when farmers deliberately withhold food supply to push up prices, people should stop eating and starve to eliminate the ‘excess supply’.
The existence of profits above ‘normal profits’ means that the government has scope, even within the current system, to invoke tax hikes on corporations and not risk altering the distribution of resources.
There is also evidence of anti-competitive behaviour in various energy markets – for example, the European gas market, which would break the regulative rules.
In the first instance, governments should introduce ‘cash machine’ taxes, aka ‘windfall profits’.
BP has done nothing clever to reap such profits. There is no advance of human well-being involved in that company having such massive profits and being able to pay its arrogant CEO such an obscene wage.
The market concentration has delivered them the bounty.
Apparently, BP breaks even at a crude oil price of $US40 per barrel.
So the government could reap massive tax revenue, which could be used as a bargaining chip to pressure these energy companies into reducing prices – a sort of sliding scale quid-pro-quo tax scale.
There is also the small (rather large) matter of corporate welfare in this sector.
The IMF Working Paper (WP/21/236) – Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel Subsidies (released September 24, 2021) – updated previous estimates of the corporate welfare involved in this sector. It is massive.
In Australia, the federal and state governments hand out massive subsidies to coal, gas and oil companies. It would divert me to document this in this post but there are ample examples of governments building dedicated infrastructure for these companies (rail and port facilities, etc), which essentially provide public funding for profit.
Governments should reduce this support dramatically.
Then we get to the public-private ownership issue.
Regular readers will know that I favour the public ownership of all essential activities and energy production is one of them.
We have a good example of how that ownership difference matters at present.
The Bloomberg article (March 13, 2022) – France Unveils Rule to Partly Protect EDF From Power Price Jump – reported that:
To help cap the increase in electricity bills for small users at 4% this year, the government has cut a levy on power, postponed part of the increase of regulated tariffs into next year, and has asked EDF to raise by 20% the volume of nuclear power it sells to rivals at a deep discount to market prices.
No such action is being taken in Australia against the ‘privatised’ energy companies.
Governments can also introduce straight-out price controls, which are common during war-time. While the Ukraine conflict is not (yet) a world war, the interlinked nature of the world economy now makes the consequences of this single-country war zone felt by all.
The US government used such controls during the two World Wars and the Korean War, and again, late in the Vietnam War. The controls were opposed by many economists and corporations but were highly successful in containing price rises in the face of supply constraints.
The point is that the current situation is highlighting everything that is wrong with Capitalism.
Workers are getting screwed by suppliers with market power deliberately withhold supply and inflate the profits of the corporate sector beyond anything that should be considered reasonable.
The system is thus generating massive increases in inequality and governments are being pressured to hike interest rates and cut spending – which will further screw workers and further help financial market speculators make enormous profits.
You can be assured the spending cuts will not be targetted at the subsidies the corporations receive.
It is a system that doesn’t work for us and it should be changed.
Viviane Forester foresaw a future where Capital would find a way to eliminate those it felt were redundant to their aims – to make massive profits and enrich the few.
This tendency is broadening as neoliberalism ensues – as it hollows out the middle class and further enriches the elites.
The current period where firms who claim to be energy provides admit to having become ‘cash machines’ exemplifies the way that most of us are just considered to be fodder for the profit-making system.
If we don’t do something about it then the system will work to make more of us redundant.
And then what?
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.