For instance, OPEC doesn’t foresee a peak in oil demand before 2040. Such confidence may raise eyebrows – especially given the progress being made on electric cars. However, as Ross McCracken explains in a blogpost for Platts, the long range forecasts have factored that in:

“That oil demand from Light Duty Vehicles — everyday passenger cars — will contract is already assumed. This results only partially from the adoption of Electric Vehicles (EVs); another factor is the improving fuel efficiency of internal combustion engines, which is expected to increase on average for the global parc (population of cars) from about 25 mpg today to 40 mpg by 2040.

“Thus the number of cars in the world can nearly double, but so long as even a fairly small proportion of them are New Energy Vehicles, overall oil demand from the sector will fall.”

But what the forecasters haven’t factored in is the electrification of Heavy Duty Vehicles (HDVs) – i.e. trucks and buses – which account for a bigger share of global oil demand than cars do.

The electrification of buses is already underway:

“Production of e-buses has been ramped up surprisingly quickly in China, in good part supported by subsidy, but they have found both a ready domestic and foreign market in megacities as far afield as Buenos Aires and London, where politicians are keen to cut urban air pollution. Although figures vary, Chinese e-HDV production, largely of buses, exceeded 100,000 in 2016, up from less than 10,000 a few years earlier.”

The electrification of trucks, however, is a more difficult challenge. Commercial freight carriers are less likely to receive government subsidies than public transport; and because they mostly travel between cities, rather than within them, there’s less (though growing) pressure to curb the local pollution they produce. Furthermore, the long journeys they undertake and the heavy loads they carry push up against the limitations of battery technology.

The assumption, therefore, is that diesel-guzzling trucks will be around for decades, propping-up global oil demand for the foreseeable future:

“Global GDP is forecast to nearly double between now and 2040 and that means much more commerce, people and trade, adding hugely to the movement of goods and people around the planet. So if commercial transportation cannot be electrified, then oil demand retains a huge market sufficiently robust to deliver long-term growth over and above the expected contraction in the LDV segment.”

Of course, all of that is to reckon without faster-than-expected innovation. And, as if by magic, Tesla has just unveiled a new fully-electric semi-automated truck – yours for a mere $150,000 (for a 300-mile range vehicle) or $180,000 for one that can do 500-miles before recharging. Production is due to start in 2019, disrupting the HDV market much earlier than had been commonly expected.

The availability of a workable alternative to diesel could also accelerate the pace at which governments crackdown on air pollution in residential areas, with tougher regulation and higher levies on dirty vehicles further tipping the economics in favour of e-trucks.

This, Ross McCracken argues, could be a very big deal:

“If commercial transportation can adopt electrification, it would result oil demand peaking much earlier than most forecasts currently suggest and oil would become a sunset industry.”

People are reluctant to invest in sunset industries – especially when the investments required tie-up capital for decades. Without the funding to modernise ancient infrastructure, the pace of decline accelerates. Therefore thanks to innovation and capitalism at its dynamic, disruptive best, the end of oil as a major industry could come a lot faster than conventional forecasters anticipate.

This is something that worth bearing in mind more generally: Mere assumption – no matter how expertly arrived at – is always vulnerable to those who imagine the impossible and make it happen.

The six articles in this special series:

Peter Franklin: Why the price of oil has been so hard to predict – and why that might change;

Michael Burleigh: Wars and words: a crude history of oil prices

Michael Liebrich: $10 a barrel for oil? The age of the electric car is closer than you think

Charlotte Pickles: Soaring oil prices broke the economy, collapsing prices won’t have such a dramatic effect

Sean Oliver-Dee: Shi’a-Sunni relations are already volatile. $10 oil could make it even worse

Liam Halligan: Sound as a barrel: Russia is surprisingly insulated from the effects of bottom-dollar oil

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.

A look at the Shi’a-Sunni conflict within the Kingdom of Saudi Arabia

Saudi Arabia’s Sunni-Shi’a relations are a cycle of repression, rebellion and activism that dates back decades. The execution of Shi’a cleric and activist Sheikh Nimr al-Nimr, along with three other Shi’a clerics, in January 2016, was the latest chapter in the long-running and unequal struggle between the Sunni Saudi government and the Shi’a minority. In the 1980s there was armed confrontation, which was brutally put down, and after which many leading Shi’a clerics came to an accord with the Saudi government in 1993 – one Al-Nimr refused to join.

It’s an unhappy arrangement, with Shi’a resentment at their treatment never too far from the surface. And oil plays a key role in maintaining it.

Saudi Arabia’s oil sector accounts for around 87% of its budget revenues, and that oil is concentrated where much of the Shi’a population is concentrated, with many working in the industry.[1. Dilip Hiro, ‘A Matter of Crude Politics’, The Guardian, 12 December 2006] Which helps explain why an uneasy co-existence is maintained by the Saudi rulers: oil is the Kingdom’s life-blood, any action which might damage the industry would be catastrophic. Shi’a populations in other Gulf states (notably Kuwait in 1986) have shown that they are capable of striking at the oil industry and causing enormous damage.

Yet because of the Saudi monarchy’s role as the Custodians of the Two Holy Mosques (Mecca and Medina), the holiest sites in Islam, any further compromise with their Shi’a minority would be seen by many Sunnis as a fundamental dereliction of religious duty.[2. It’s worth noting that, although Iran has some important Shi’a sites such as the Imam Reza Mosque in Mashhad, the holiest sites: Najaf and Karbala, are in Iraq. The Imam Ali Mosque in Najaf is the resting place of the Fourth Caliph. Karbala is where Hussayn was murdered in 680CE. An event which is commemorated by the Shi’a every year in the Festival of Ashura.] The Wahhabi form of Sunni Islam espoused by the Saudi royal family rose to prominence on its claim to unsullied religious piety and purity. This impacts on how the Kingdom engages not only with their own Shi’a population, but also with Shi’a communities across the Middle East and especially the (Shi’a) Islamic Republic of Iran.

Iran and the Shi’a Awakening

The rising influence of Iran, another state with huge oil reserves, has emboldened Shi’a communities throughout the Middle East to be more pro-active in seeking concessions from their Sunni governments. This growing confidence has been labelled the ‘Shi’a Awakening’ or the ‘Shi’a Crescent’ (a reference to the broad shape of the geographical areas inhabited by Shi’a populations across the region). Shi’a Muslims are a sizeable minority in most countries across the Middle East, and a majority in Iran, Iraq and Bahrain (as well as forming the larger part of Lebanon’s Muslim population).

The Shi’a Awakening and the rise of Iran has given Saudi Arabia the opportunity to present itself as the defender of Sunni interests. For instance, it has funded Sunni militias in Syria (countered by Iranian funded Shi’a militias, most notably Hizbullah). More recently, Saudi Arabia, with the backing of Bahrain and the United States, intervened in Yemen after the Shi’a Houthi movement captured the capital and promptly offered a commercial flight route to Iran. Saudi Arabia, desperate not to allow Iran a toe-hold on the Arabian peninsula, took immediate military action. That war is ongoing.

Tensions are also rising in Lebanon, where, yet again, Iran and Saudi Arabia are backing rival factions.

To date, Iraq has been Iran’s biggest victory in this regional-sectarian struggle – with Iranian backed militias and political allies taking control in the wake of the US-led invasion. Which is where the religious ‘purity’ comes into play – the Sunni militias who would have been Saudi Arabia’s natural allies hated the Saudi government for not being the ‘pure Sunni Muslims’ they presented themselves to be. Particularly unforgivable in the eyes of ISIS and al-Qa’ida, was the fact that the Saudis had allowed non-Muslim soldiers on the Holy Arabian Peninsula during the Gulf War, although the ongoing presence of western businesses in Saudi Arabia was also a cause of upset. Therefore, Iran was able to extend its influence in Iraq because Saudi Arabia was unable to mount an effective counter-strategy.

If Saudi Arabia was not so dependent on the oil sourced from Shi’a-populated areas, they would have little reason to maintain that accord. A dramatic fall in the oil price could trigger an escalation in conflict.

What happens if the oil price falls

The price drop would, of course, be catastrophic for Iran as well as Saudi Arabia. Indeed, both countries have recognised the dangers posed by their over-reliance on oil and are seeking to diversify their economies. The recent purge of top officials orchestrated by Crown Prince Mohammed bin Salman in Saudi Arabia is part of the same dynamic: putting the ‘house’ in order to curb expenditure and attract alternative investment. The Iran nuclear deal can be seen in much the same way.

For the Saudis, however, the objective of maintaining their religious legitimacy by not allowing the Arabian Peninsula to be further ‘polluted’ with non-Islamic influences would remain. In this context a $10 oil scenario could be seen by the Saudi government as an opportunity to move more aggressively against the Shi’a minority. A heavily diminished oil industry may in fact prompt the Shi’a minority to leave of their own accord to look for work elsewhere (they are barred from working in government or the military).

That displacement might be a best-case scenario. More catastrophically, a dramatic fall in the oil price could lead the Saudis to forcibly expel or violently oppress their Shi’a population, which might provoke Iran to intervene. At that point, $10 oil could shift Saudi Arabia and Iran from proxy wars into all out war.

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.

What Yamani missed, but Elon Musk, founder of electric vehicle company Tesla, spotted, was that battery technology was developing so fast that electric cars would soon match the performance of internal combustion cars, and then comprehensively outcompete them.

The top-of the range Tesla SUV accelerates faster than a Bugatti Veyron, but can also seat seven, carry as much luggage as a Volvo estate and pull a caravan. It costs less than half of its petrol or diesel equivalent refuel, and with a tenth of the moving parts, has lower maintenance costs. Electric cars are smooth, quiet, and quick off the lights. They are also far superior as a platform for all the automation and communication technologies that are set to transform our driving experience and road safety.

So why do electric vehicles still make up such a small percentage of vehicle sales, less than 2% in the UK? Three reasons – range, charging time and infrastructure – but all of them will soon be history.

Tesla has shown that it is perfectly feasible to build an electric car with 300 miles driving range – as long as you’re not overly worried about price. But soon that sort of performance will be affordable: battery costs have fallen 70% in the last five years, and the next ten years will see them fall another 70%. Electric cars are already often cheaper than a petrol or diesel car if you include running costs, and that’s excluding subsidies.

By 2025 electric cars will start winning on showroom price alone. No technological breakthroughs are needed (although thousands of researchers are looking for them), just the same sort of scale-driven cost reductions that we have seen in flat-screen TVs, solar panels, even combustion engines in their time.

What about charging time? The current generation of rapid-chargers already allow you to add 170 miles of range in 30 minutes; the next generation will allow you to fill your car more quickly than you can empty your bladder and pick up a pint of milk.

Let’s bust a few more myths: there are no shortages of lithium, nickel, cobalt and copper that won’t be fixed by investment; the ‘rare earths’ used in modern electric motors are not that rare; putting the kettle on while charging an electric car won’t blow a fuse – your charger will just slow down for a few minutes; the UK won’t need 30 new nuclear power stations to meet the additional electricity demand – National Grid estimates we will need around 5GW of additional peak power, an increase of just 10%.

Policy-makers have woken up to electric vehicles as a way of solving the horrendous problem of urban air pollution. Several major world cities, including Paris, Mexico City, Madrid, Athens, Stuttgart and Oxford, have already decided to ban internal combustion cars within a few years, others are sure to follow.

Norway, where two out of five new cars already have plugs, will ban the sale of internal combustion cars and vans by 2025. Holland and India are outlawing the sale of petrol or diesel cars after 2030. China – salivating over the opportunity to take leadership of the world’s car industry – is mulling a ban by the same year. The French have gone for 2040, as has the British Government. Even Angela Merkel has accepted as inevitable that Germany will eventually ban internal combustion cars.

Car companies are falling over each other to catch the electric drive train. Volkswagen – still reeling from Dieselgate – has announced it will launch 50 electric models by 2025, which it expects to account for a quarter of its sales. All Volvo models launched from 2019 will be electric or hybrid. Mercedes Benz is investing $10 billion to launch 10 electric models by 2020. General Motors has announced it is committed to an all-electric future. Nissan has produced more electric vehicles than Tesla, and Chinese company BYD nearly as many. Every week brings more announcements.

The impact on oil demand may not be immediate but it will be profound. Cars and vans account for around 30% of global oil demand, but heavier trucks and buses will also go electric in the fullness of time, threatening a further 15% fall in demand. Heavier vehicles require bigger batteries and a more powerful charger, but the economics are unchanged.

Might hydrogen still derail this vision of the future, suddenly leapfrogging advances in battery technology? After all we have certainly seen governments back the wrong technologies, most recently when they encouraged the use of diesel to reduce CO2 emissions.

But in a word, no. The laws of thermodynamics mean that hydrogen production is inherently inefficient. You can produce it from natural gas, but you are much better off just consuming the gas directly. Or you can use electrolysis, but by the time you have generated hydrogen, compressed and stored it, moved it around, and then used it to regenerate electricity, you’ve squandered some 70% of input energy. Hydrogen may perhaps find a role providing seasonal energy storage, or as a chemical feedstock, or powering driverless long-distance trucking. But as the world’s main transport fuel it is simply dead before departure.

What about the remaining 55% of global oil demand? Oil will still be used in shipping and aviation for many years, and in the petrochemicals industry. But over a multi-decadal time-frame I would be very surprised if we did not see breakthroughs which dramatically erode those markets too. In an era of low-cost gene editing, additive manufacturing, graphene, designer materials, nanoscale composites, machine learning and pervasive connectivity, it’s fanciful to think that the global economy will remain forever dependent on fossilised swamp goo.

So Sheikh Yamani was right, the writing is on the wall for oil, though not for the reason he thought. Oil’s long-term future will not be – as Peak Oil doomsayers so fashionable during oil price spikes would have us believe – that it becomes more and more sought after at ever-higher prices. It is that it will becomes less and less critical to the world’s economy over time, and its price will wither.

$10 a barrel in our lifetimes? Why not!

There’s an old saying: If you want to make God laugh, tell Him your plans.

Alternatively, show Him your oil price forecast.

The whole field is a case study in the fallibility of experts. For instance, here, from just before the millennium, is the Economist anticipating a continuing slide in the oil price:[1. The Economist, ‘The next oil price shock’, 4 March 1999]

“…$10 [a barrel] might actually be too optimistic. We may be heading for $5…Thanks to new technology and productivity gains, you might expect the price of oil, like that of most other commodities, to fall slowly over the years. Judging by the oil market in the pre-OPEC era, a ‘normal’ market price might now be in the $5-10 range. Factor in the current slow growth of the world economy and the normal price drops to the bottom of that range.”

What actually happened next was a world-changing rally in oil prices – spiking at over $140 dollars a barrel in July 2008. Prices came crashing back down again with with the financial crisis, but then unexpectedly recovered to over $100 in the early part of this decade – before surprising everyone by halving between mid-2014 and the start of 2015.[2. Macrotrends, ‘Crude Oil Prices – 70 Year Historical Chart’, November 2017]

This prompted a prediction from the veteran financial analyst Gary Shilling that prices were heading even lower, perhaps as far down to $10.[3. A. Gary Shilling, Forbes Investing News Letters, ‘$10 to $20 per barrel oil is still likely’, 6 May 2016] Since then, prices have in fact hardened. As of mid-November, they were heading up towards $60 – prompted by concerns over political turmoil in Saudi Arabia.

Why is predicting the oil price so difficult? And, more to the point, why are we so desperate to keep trying?

Why oil is special

Let’s start with what makes oil so valuable in the first place. Most obviously, it’s a fossil fuel – countless years of photosynthesised solar energy in geologically concentrated form. But oil isn’t just concentrated energy, it is liquid concentrated energy. This makes all the difference. As you’ll remember from school, a liquid flows but holds its volume. Oil is therefore easier to move around, process and consume than coal or gas.

That’s especially important when it comes to transport. In the age of steam, our ships and trains relied on coal. But by the early 20th century, it was obvious that oil would change everything.

It was an issue that Winston Churchill had to grapple with in his capacity as First Lord of the Admiralty in the years before the First World War. Great Britain was faced with a decision of huge strategic importance – whether to upgrade from a coal-based to an oil-based navy. Churchill knew it had to be done. Fuelled by oil, ships weren’t just faster, they were also less visible to the enemy because they produced less smoke. Furthermore liquid oil, unlike solid coal, can be pumped – allowing ships to be refuelled at sea from tankers instead of having to find a friendly port.[4. And without exhausting the crew with the backbreaking work of loading coal onboard]

The big drawback was security of supply. At the time, Britain had plenty of coal, but no oil. The ensuing dilemma (utility versus security) would only become more acute as it became clear  that oil wouldn’t only make ships and trains more efficient, but would also realise the potential of smaller, lighter forms of transport – i.e. road vehicles and aircraft. Coal made the industrial revolution possible, but oil made modernity possible.

Oil is central to our way of life, which is what makes it so valuable. Per unit of energy contained, it typically commands a significant premium over coal and gas. For instance in 2010, the US price of petroleum was $13.43 per million BTU (British Thermal Units) versus $5.69 for natural gas and $2.08 (or less) for coal.[5. Robert Rapier, Forbes, ‘The price of energy’, 26 January 2010]

The geopolitics of oil

However, to explain why that higher price is so volatile we need to consider the other concentrated thing about oil – it’s geographical location. Oil can be found in many places around the world, but the most abundant and easily exploited oil reserves are to be found in just a few locations – most importantly in the Middle East. The sheer concentration of such wealth tends to concentrate power in the hands of those who can control it by force of arms. It is, therefore, no accident that oil-dominated economies tend to have undemocratic governments with values hostile to our own.

The result is a deep strategic vulnerability that western governments have struggled with for more than a century. When, in 1913, Churchill was challenged on his decision to make the Royal Navy dependent on a foreign source of energy, this was his response:[6. Winston Churchill, House of Commons Hansard, 17 July 1913, column 1477]

“…it is not a case of choosing this course against that. On no one quality, on no one process, on no one country, on no one company, and no one route, and on no one oil field must we be dependent. Safety and certainty in oil lie in variety, and in variety alone.”

The West has endeavoured to keep things that way ever since – and it’s greatest achievement in this regard was the creation of a global market for oil. Thanks to the oil tanker, oil can be transported from anywhere in the world, to anywhere in the world. Unlike, say, a natural gas pipeline from Russia to a neighbouring country, particular oil importers are much less dependent on particular oil exporters.

However, though the global market helps with security of supply, it offers no guarantee on price. Exporters with the technical and economic ability to flex their production levels up and down (i.e. those with the biggest reserves that can be most easily and cheaply exploited) have a huge influence on the amount of oil supplied to the market. This is especially true of Saudi Arabia, which has long enjoyed its status as the world’s ‘swing producer’ – a power it has magnified through its leadership of the OPEC cartel.

The global oil market, therefore, is not a normal market, but one that can be manipulated by a small number of people in a small number of countries – and often for non-economic motives.

The impact on growth, jobs and prices in the West has been profound – with oil prices both the cause and effect of economic boom and bust over many decades.

Unsurprisingly, Western governments have sought to influence the politics of the Middle East – with the goal of keeping prices low and stable, but often by means of diplomatic and military interventions that have had the opposite effect.

Further complications

If these complications were not enough, we can now add several others to the mix.

Firstly, the rise of China as a great industrial power with a corresponding thirst for imported oil. Last year Chinese imports exceeded America’s for the first time. [7. Meng Meng and Florence Tan,  Reuters, ‘China overtakes U.S. again as world’s top crude importer’, 13 October 2016]

Secondly, the depletion of the world’s biggest, most easily exploited oil fields. According to a report by HSBC, “81% of world liquids production is already in decline” and at a rate that means “the world could need to replace over 4 times the current crude oil output of Saudi Arabia” just to maintain current supply.[8. Kim Fuster et al, Global oil supply: Will mature field declines drive the next supply crunch?, HSBC, September 2016] Replacing so much exhausted capacity would mean relying on ‘unconventional’ sources of supply which require higher inputs of capital and technical expertise. While fears of a near-term peak in oil production may have come and gone with the 2008 spike in prices, we can agree with a former Shell CEO when he said that the age of “easy oil” is over.[9. Jeroen van der Veer interviewed by Lee Hudson Teslik, Council on Foreign Relations, 3 April 2008]

Thirdly, there’s been rapid progress on one form of unconventional oil (and gas) extraction – the use of directional drilling and hydraulic fracturing (‘fracking’) to exploit tight oil formations. The fracking revolution has reversed the long-term decline in US oil production, making America less dependent on imports.

Fourthly, the lifting of sanctions on Iraq and then Iran has opened up supply from two of the world’s top ten oil producers.

Fifthly, multiple military conflicts in the Middle East, including those in Syria, Iraq and Yemen, have had an impact on oil prices – but not, so far, the expected one. Regional rivalries have undermined OPEC unity. Indeed, it is argued that Saudi Arabia has allowed oil prices to fall in order to punish Iran and Russia for their interventions in Syria. However, if the political and religious enmity between Saudi Arabia and Iran escalates from various proxy wars to direct conflict, the impact on oil production and supply could be devastating.

Sixthly, Russia remains the biggest producer and second biggest net exporter of oil in the world. It’s economy is heavily dependent on revenues from exports to the West – but it also uses those revenues to fund interventions that bring it into conflict with the West.

Of these six factors, the first and second put upward pressure on prices, the third and fourth downward pressure, while the fifth and sixth could go either way. The precise balance between these and other conflicting influences is shifting all the time, which is why oil prices are so volatile – and also, in the absence of perfect information and super-human judgement, so hard to predict.

Demand destruction

But what if there were a new factor, one so overwhelming as to make the balance between the others irrelevant? Many experts believe that such a force has been unleashed and is gathering strength: the force of demand destruction.

Oil imposes so many costs on the West – geopolitical, economic and environmental – that we’d surely be using alternatives if they were available. In fact, in some sectors, such as electricity generation, that’s exactly what’s happened.

However, in the transport sector, our options are limited. Or, rather, they were. Improved fuel efficiency and biofuels are curbing our appetite for oil, but another technology could pretty much kill it.

Rapid progress is being made by battery electric vehicles. 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. Furthermore, the climate change commitments that nations have entered into under the Paris Agreement requires a phasing-out of fossil fuel use from most sectors of the economy – including road transport.

Just how much global oil demand would this destroy? According to BP, cars currently account for the 20% of global oil demand [10. Spencer Dale and Thomas D Smith, BP, Back to the future: electric vehicles and oil demand, October 2016]. However, that is not the limit of what could disappear as a result of electrification. Advances in battery technology mean that other demand sectors are vulnerable too – including heavier road vehicles which account for 24% of global oil demand. Batteries combined with increasingly cheap renewable energy has the potential to drive out the world’s remaining oil-fired electricity generation (another 5% of global oil demand according to the BP figures).

Of the remaining half, much of that could go too. Industrial uses of oil account for 28 per cent of global demand. However, a big chunk of that is used in the process of extracting and refining oil. In the United Kingdom, for instance, the energy sector uses as much oil for its own energy needs as all the other industrial sectors put together.[11. Department of Business, Energy and Industrial Strategy, Digest of UK Energy Statistics 2017, July 2017, table 1.1, page 30] We can reasonably expect the oil industry’s own demand to decline in proportion to the overall decline in demand.

That leaves just a few slivers of demand. Some like the use of oil as a heating fuel in the domestic, commercial and public sectors can be readily displaced by electricity, natural gas and energy efficiency measures. Others, especially aviation, present a much tougher challenge – but can’t possibly make up for demand destruction elsewhere.

Conclusion

Therefore, unless the development of battery electric vehicles runs into an unexpected brick wall or the world suddenly abandons its fight against climate change, the bottom is set to drop out of the oil market.

A world of $10 oil may finally come to pass – and within most of our lifetimes. For the West (and the other oil importing nations) that will be a world in which, paradoxically, the oil price doesn’t matter anymore – because we won’t be using much of it. The decades of disruption caused by the rise and fall oil prices will be over. As will a key strategic vulnerability for the West. For the big oil exporters, however, the impact will not be as positive. Indeed, unless they adapt, it will be economically devastating. But there is a sliver-lining. Despotic governments that could previously rely on their oil wealth, will have rely on their people instead. This too will have consequences.

Read part two in UnHerd’s oil series: Wars and words: a crude history of oil prices

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.