What explains this astonishingly resilient world? As occasionally happens in history, broad structural shifts created a tidal wave of growth that overwhelmed the business cycles and political tensions of the age. Today, for the first time, there is a genuinely global economy. Over the last 15 years, virtually all countries have come to govern themselves by the basic rules of open trade and markets. From India to China and Costa Rica to South Africa, the “emerging markets”–really, the emerged markets–now make up 30 percent of global GDP. The immediate effect of all this growth is rising demand, particularly for raw materials and energy. (Commodity prices are not simply high, they are at 200-year highs.) That’s a big reason that oil-price shock has not slowed the economy: the spike is the result of a boom in demand, not a squeeze in supply.
Look around the world of markets and you will see an odd phenomenon. There is a group of countries that can flout all the rules, resist modernization and spout anticapitalist rhetoric. The list is obvious: Iran, Saudi Arabia, Russia, Venezuela. These oil-rich countries are exceptions to the new rules of the global economy. Indeed, their existence is made possible by the success of the global market.
This is the yin and yang of the modern economy. Global capitalism creates demand, which creates space for noncapitalists. Consider the political consequences: Venezuela has been engaged in the most spirited challenge to American interests in the Western Hemisphere in a generation. Iran is making a bid to become a regional hegemon. Russia, arguably the richest country in natural resources, is attempting nothing less than conquest of its old empire.
Oil supplies will stay tight for a simple reason. There are only five countries that matter in the world of oil–Saudi Arabia, Iran, Russia, Iraq and Venezuela. In none of these, with the possible exception of Saudi Arabia, are serious efforts and investments being made to expand the supply of oil. Russian production is growing at less than 3 percent a year. Iran is flat, Iraq is in chaos and Venezuelan production has dropped 50 percent since Hugo Chávez took office.
What all these nations need is government that would invest the oil windfalls in expanding production and supply–but that would take 10 to 15 years to bear fruit. And all these dysfunctional regimes are too busy buying off their populations with cheap subsidies. Unless these governments cease to behave as islands of corruption and dysfunction, they will slowly but surely sow the seeds of their own long-term decline. The necessary investments are huge. Goldman Sachs’s Jeffrey Currie estimates it would take $3.5 trillion in the next decade to keep up with rising demand. Actual investments are going to be much lower, suggesting the price of oil will stay high in the medium term.
One consequence of high oil prices will be to focus attention on technologies of extraction. In 1859, Col. Edward Drake struck oil at 69 feet. Today, as energy analysts Peter Huber and Mark Mills note, “it is not unusual to drill for oil through 10,000 feet of water, 20,000 feet of vertical rock and another 30,000 feet of horizontal rock.” And the price of the 10-mile oil is about the same as Drake’s 69-foot oil. There’s an even bigger shift underway, from fuel to electricity. In 1950, 20 percent of U.S. economic output came from industries powered by electricity. Today that number is 60 percent and rising fast. All the growth sectors, from technology to services, are powered by the grid, not gasoline. What will feed this grid–coal, nuclear power or new technologies–is another large subject, but one thing is certain: it will not be oil.
Petrol is increasingly confined to one pivotal sector: transportation. And even here the future is electric. Within 10 to 20 years, hybrid electric motors will replace the internal-combustion engine. Neither oil companies nor oil states will disappear. But they will go from being the lifeblood of the industrial world to just one of many sources of energy. After a century and a half, oil will be put in its proper place.
