[Marxism] The History and the Future of Boom-Bust Oil Prices

Louis Proyect lnp3 at panix.com
Sun May 28 07:39:43 MDT 2017


LRB, Vol. 39 No. 11 · 1 June 2017
Buckle Up!
by Tim Barker

Crude Volatility: The History and the Future of Boom-Bust Oil Prices by 
Robert McNally
Columbia, 300 pp, £27.95, January, ISBN 978 0 231 17814 3

When Donald Trump nominated Rex Tillerson, the CEO of Exxon, as 
secretary of state, Robert McNally found the choice unremarkable. ‘The 
closest thing we have to a secretary of state outside government is the 
CEO of Exxon,’ he said. McNally is an energy consultant, a former 
adviser to George W. Bush, Mitt Romney and Marco Rubio, and a member of 
the National Petroleum Council.

Crude Volatility would be a good title for a biography of Trump, but 
McNally’s book was written before the election and studiously avoids 
political controversy. The book expands on a pair of articles (written 
with Michael Levi) in Foreign Affairs, which argued that recent 
fluctuations in the price of oil marked the end of a period of relative 
stability that began in the late 1970s. The first piece ran in 2011, 
when the yearly average price of Brent crude exceeded $100 for the first 
time. The follow up, ‘Vindicating Volatility’, came in late 2014, after 
three years of relatively stable prices had given way to a new price 
collapse. The book, which appeared in January when prices were around 
$55 a barrel, gives a deeper historical exposition of McNally’s (so far 
valid) forecast of persistent price volatility.

Since drillers in Pennsylvania first struck ‘rock oil’ in 1859, the uses 
of petroleum have shifted – illumination, electricity, heating, machine 
lubrication, fuel for internal combustion engines – but through it all, 
market forces by themselves have been unable to bring supply and demand 
into balance at a stable price level. This is unusual. If a blight makes 
tomatoes, say, harder to come by, tomatoes will be more expensive and 
consumers will demand fewer of them and buy other kinds of produce 
instead. If farmers overestimate the popularity of tomatoes they will 
grow too many and the price will fall, leading some farmers to stop 
supplying tomatoes and start growing something else. Either way, the 
market for tomatoes will find an equilibrium, a price level at which no 
producer willing to accept the going rate will be left with unsold 
produce and no buyer willing to pay the going rate will find empty shelves.

In the case of oil, however, both demand and supply are unusually 
unresponsive (inelastic) to changes in price. Oil is too important and 
difficult to replace for a rise in price to cause a fall in consumption. 
And if prices fall, the relatively low cost of continuing to run 
existing wells (as opposed to the stupendously high costs of bringing 
new oilfields on line) means that supply won’t immediately fall far 
enough to bring prices back up. But both supply and demand can have 
long-term consequences: oversupply may continue because of the 
completion of drilling projects begun in times of scarcity, or demand 
may begin to lag after a boom because consumers have gradually responded 
to high prices with ways of permanently replacing oil – as happened in 
the US in the 1970s, when oil was replaced as a source of electricity by 
natural gas, coal and nuclear power. This instability is frustrating for 
producers, who by themselves are powerless to control supply in response 
to price fluctuations. But if many sellers co-ordinate their actions 
(either because of voluntary collusion or imposed constraints) they do 
have the power to administer stable prices where the market cannot.

The bulk of McNally’s book tells the history of the oil business as a 
series of such attempts to control supply. These efforts, he argues, 
have been successful enough to make us forget that stable oil prices are 
unnatural and can’t be counted on. They can be maintained only through 
painstaking and ultimately unsustainable co-ordination between 
businesses and governments. In 1931, as global depression took hold and 
prices fell, the governor of Oklahoma shut down oil wells by military 
force, declaring that ‘the price of oil must go to $1 a barrel; now 
don’t ask me any more damned questions.’ Price stability grows from the 
barrel of a gun, not the ministrations of the invisible hand. But 
precisely because the project is so political, it is also fragile. 
McNally argues that we have become used to price co-ordination over the 
past century, but that era is now at an end. No single actor – not even 
the king of Saudi Arabia – is today powerful enough to exert the kind of 
control once enforced by the Oklahoma governor.

Oil – the compacted remains of prehistoric life – has always oozed to 
ground level, and people have always found something to do with it: 
caulking their canoes, painting their faces, lubricating their tools. In 
the 1860s, whale oil became too expensive to use as a source of light, 
and start-up hucksters in Pennsylvania discovered they could pump oil 
out of the ground in greater volumes than anyone expected. As the market 
grew rapidly, the industry developed a tendency towards overproduction. 
With a growing economy, demand would surge and prices would go up, 
leading wildcat drillers to flood into the oil regions; oversupply would 
lead to price collapses and ruin the men who had sunk everything they 
had into pressurised wells and pumps. In the thick of this 
entrepreneurial swamp, John D. Rockefeller recognised that in a free 
market, voluntary co-operation would always give way to ruinous 
competition. Assiduously, Rockefeller and his Standard Oil trust 
integrated the chaotic functions of the oil business, and struck deals 
with the railroad companies that brought oil from the fields to market. 
In doing so, they did great violence to the ideal of free competition, 
but also rationalised the industry so that it could supply fuel at 
stable prices.

McNally, following such business historians as Ron Chernow, argues that 
Rockefeller’s market power led not only to stable prices but to 
consumer-friendly bargains. The public wasn’t so charitable at the time, 
however, and anti-monopoly resentment meant the break-up of Standard Oil 
and the transition to a period of competitive volatility. This 
interregnum came to an end in the 1930s, when the stakeholders in 
Oklahoma and Texas – Pennsylvania’s successors as the centre of American 
oil production – established legally enforced production quotas limiting 
production under the aegis of the Texas Railroad Commission. New 
oilfield discoveries in the Middle East were integrated into the Texas 
regime of price control when the dominant companies, known as the Seven 
Sisters, signed favourable concession deals with the emergent 
postcolonial states.

The Texas cartel reached the highpoint of its control over global oil 
production in the 1950s. But triumph quickly led to overreach when the 
world-bestriding conglomerates tried to impose a punitive price 
reduction on Middle Eastern and Venezuelan oil. Iran, Iraq, Kuwait, 
Saudi Arabia and Venezuela formed Opec – a global cartel of oil 
producing nations self-consciously modelled on the Texas Railroad 
Commission (even employing former TRC consultants on retainer). They 
began to experiment with production agreements and export quotas. When 
the United States set itself at odds with Arab nations in the 1973 Yom 
Kippur War, Opec responded with an embargo that marked the end of the 
Texas era of oil stability and introduced a new system of supply control 
on an even greater scale.

In the context of the broader economic dislocations following 1973, 
Opec’s assertion of power seemed definitive. But commodity 
anti-imperialism was a paper tiger. In the long run, Opec couldn’t force 
people to sell at high prices, or stop new oilfields being discovered in 
parts of the world that weren’t subject to their agreements. The key to 
controlling world oil prices, McNally insists, was spare capacity: 
control over existing oilfields that could be brought on line when 
demand rose and shuttered when demand fell. At one point, Rockefeller’s 
Standard Oil had occupied this role; in the Opec era, Saudi Arabia did 
its best. But the role of swing producer exacts serious costs. You have 
to be willing to buy dear and sell cheap, because the whole system 
depends on your countervailing pricing. Ultimately, the vagaries of 
demand and the constant discovery of new oilfields meant that no single 
country was willing or able to be the swing supplier. And so, according 
to McNally, the long exception of stable, administered oil prices has 
come to an end. Opec, so unsettling to Americans in the 1970s, is now 
powerless to control the dramatic fluctuations – from $147.27 on 11 July 
2008 to $30.28 on 23 December 2008 – characteristic of the new oil 
market. We have come to inhabit, McNally concludes, the first free 
market in oil in living memory, and it would be foolish not to expect 
some whiplash.

There is something vexing about Crude Volatility. The book explains that 
oil prices left to themselves are inherently volatile, but that for most 
of the history of the industry, producers have found ways to control 
supply and stabilise prices. The portraits of the supply controllers are 
etched with sympathy – McNally’s history strongly suggests that managed 
markets were all but inevitable, and often preferable to the 
alternative. He casts his account as a revisionist recuperation of the 
monopolists and cartelisers. We need to ‘forget the monopoly man’ 
stereotype, he says, and realise that men like Rockefeller shouldn’t be 
seen as tyrannical price-gougers, but as giants who helped everyone by 
stabilising and lowering prices.

But McNally doesn’t muster his historical illustrations to call for a 
new regime of market management, or to suggest that more planning might 
not be such a bad thing. He establishes his case for the coming 
volatility only to offer two words of vacuous advice: ‘Buckle up!’ We 
have to get used to it. If you take McNally’s word for it, the crucial 
policy implications of his analysis are the need to recognise the 
drawbacks of variable import tariffs and to ‘resist the temptation to 
crack down on speculators’, a group that presumably includes many of 
McNally’s clients. Not only are they benign, he says, but by creating 
opportunities for hedging, they provide an important buffer against 
unforeseeable price swings.

Another puzzle of Crude Volatility is that McNally, whose claim to 
expertise rests heavily on his experience in government, never discusses 
his time in the White House, under a president (George W. Bush) and 
during a period (January 2001 to June 2003) that must have been 
exceptionally interesting for an oil hand. I had a hard time finding out 
anything about it, except that Bush called him ‘Electric Bob’ and he 
drew the attention of Congress and the press for meeting with Enron 
representatives in the months before that company’s collapse. The book 
itself has been bleached of any political residue, not only by its 
author but presumably by the editors of the Columbia University Press 
Center on Global Energy Policy Series in which it appears. They bemoan 
the tendency toward ‘platitudes and polarisation’ and commit to make 
their series an ‘independent and non-partisan platform’. This sounds 
pleasant enough on the face of it, but has a ring of sociopathy when 
applied to topics touching on the fate of the planet.

*

The silence about politics is eloquent of McNally’s personal politics, 
which he has discussed more explicitly in more relaxed settings. ‘Most 
of energy policy-making involves pragmatic, sensible adjustments to our 
tax regulatory and security policies,’ he told an audience at the 
Brookings Institution in 2004, just after he had left the Bush 
administration (the sensible adjustments were done ‘by centrist 
moderates of both parties’ – people rather like those at Brookings). As 
long as prices at the pump stay low, he continued, most American voters 
and politicians repose in ‘a state of deep, deep, deep sleep’, allowing 
‘the folks who are really concerned about these problems to have 
meetings like this and to work on solutions’. But when gas gets 
expensive, ‘all of a sudden we flip onto mania and panic, and a search 
for instant solutions.’ If oil prices can swing democratic polities 
along with them, the question arises of what a new era of permanent 
volatility might mean for politics. But in the speech, as in his book, 
McNally has little to offer but hope that cooler heads will prevail, 
along with confidence that most things (besides price levels) will stay 
the same.

In a New York Times article from 2015 with the credulous headline 
‘Experts Say That Battle on Keystone Pipeline Is over Politics, Not 
Facts,’ McNally lamented to a reporter: ‘Why is what ought to be a 
routine matter turned into an all-consuming Armageddon battle?’ As one 
of his first acts in office, Donald Trump signed an executive order 
reviving the Keystone project and the Dakota Access Pipeline, both of 
which had been held up by the Obama administration after sustained 
protests. The pipelines attracted opposition because of the immediate 
risk posed by oil spills, but also because they touched on deeper 
issues. Keystone XL is meant to connect US distribution centres with the 
tar sands fields in Alberta. Extracting oil from tar sands is an example 
of ‘unconventional’ oil production, the sort of method to which 
producers turned only once supplies of ‘conventional’ liquid crude 
became depleted. Unconventional drilling is ecologically more risky. It 
also shows that the industry remains fixated on new discoveries, even as 
scientists warn that proven reserves already represent more carbon than 
we can afford to burn. The Dakota Access pipeline provoked similar 
worries, but became an explosive issue because its proposed route 
traversed land owned by the Standing Rock Sioux. In both cases, 
opposition to the pipelines took the form of civil disobedience, serious 
enough to force last-minute delays from the outgoing Obama 
administration. The moment for cautious centrist adjustments to energy 
policy, if it ever existed, has now given way to a new order in which 
President Trump can command the Environmental Protection Agency to take 
down pages from its website that discuss climate change. The protesters 
at Keystone and in the Dakotas knew that when the stakes are this high, 
there can be no separating facts, routine decisions and politics.

The dream of setting energy policy in a cork-lined room is even stranger 
given the reality of climate catastrophe. Global warming is mentioned in 
Crude Volatility only in passing. McNally is not a denialist, more of a 
resigned agnostic: ‘Whether we like it or not, society’s continued 
dependence on oil – at least in the near future – is basically ensured’; 
‘blessing or curse’, we will depend on oil for ‘the foreseeable future’. 
He offers a telling analogy: we know how to fix social security and 
Medicare, he says (through ‘tax hikes and benefit cuts’, apparently); 
but action on climate change is impossible because no politician can 
succeed by asking voters to make sacrifices in the name of a better 
future. The possibility that a different approach to entitlement reform 
– funded by confiscatory taxes on the wealthy, say, which didn’t require 
people on low incomes to submit to benefit cuts – might find greater 
popular support goes unmentioned. Similarly, the possibilities for 
addressing climate change without imposing insupportable burdens on 
voters are ruled out a priori. It’s easy to agree with McNally that no 
easy solution is in sight. But that is only the beginning of a thought, 
not the end. How can it be that we can’t imagine changing something that 
we know will destroy us?

In the years of constantly rising oil prices, before the bust in 2008, 
the notion of ‘peak oil’ gained currency. Initially formulated by a 
rogue Shell researcher, M. King Hubbert, in the 1950s, the idea was that 
we had reached, or would soon reach, the high point of oil extraction, 
after which production would fall off. Petro-optimists, including 
McNally, have a ready answer to peak oilers. Fears of physical depletion 
are as old as the oil industry, and have always proved to be unfounded. 
High prices drive drillers to unlock previously unknown or inaccessible 
reservoirs. The shale revolution – with its Promethean new technologies 
such as fracking and horizontal drilling – was a textbook example, and 
less has been heard about peak oil since prices fell and the US became, 
for the first time in decades, a net exporter of oil. The moral of this 
story is supposed to be that leftists, environmentalists and declinist 
cranks always underestimate the near limitless potential of human 
inventiveness to wring crude from the earth. But the attitude of 
insiders like McNally to global warming suggests that they are the 
fatalists, refusing to consider how we could avert the disaster everyone 
knows is coming. In the face of the direst necessity, the champions of 
ingenuity respond not with a strategy but a shrug.



More information about the Marxism mailing list