Fault Lines

Restarting our economies after the pandemic continues to expose the fragility of our supply chains. The Russia-Ukraine conflict serves as a stark reminder that oil and gas can still spark our anxieties. Commodity prices and our sense of vulnerability are both at multi-decade highs. 

In Disorder, Professor of Political Economy at the University of Cambridge Helen Thompson places the geopolitics of energy at the core of our current crises. That was not quite the goal—the book was started in 2016 seeking to explain the political and economic volatility of the 2010s. It can be read as a culmination of her years studying the global oil market, monetary policy, and hosting the wildly popular Talking Politics. Most analysts focus on the rise of populism and ascendant nationalism, or the demise of a liberal international order, as the defining features of the time period. But those accounts are largely ahistorical per Thompson. She instead connects how great powers navigate their energy relations to changes in financial markets, and thereby how our democratic systems function. The world she deftly weaves together is one of geopolitics all the way down, as states attempt to garner energy security while capitalizing on both the gains and instability of financial globalization.

Her analysis recasts pivotal historical moments, from the legacy of the Suez Crisis to the European Central Bank’s handling of the initial stages of the Great Recession, to show us their deep material roots and the inevitable cross-border political spillovers. As she writes in the introductory chapter, “Structural changes around energy and finance always bring tumultuous geopolitical consequences.” It does not bode well for the green energy transition that many of us so desperately desire.

An interview with Helen Thompson

NIKHIL KALYANPUR: In Disorder, you paint the shale revolution of the 2010s as a double edged sword for the US. Hydraulic fracking coupled with cheap financing increased the US’ oil and gas output dramatically—the US nearly caught up with Saudi Arabia’s oil exports and started shipping gas to Europe. The growth of the industry increased American energy independence, but it also strained relations with Saudi Arabia and heightened competition with Russia. Were these impacts inevitable?

HELEN THOMPSON: For Europe, the intensity of the commercial conflict and the geopolitical ramifications unleashed by the shale gas revolution were probably inevitable. At the time of the American shale gas revolution, which began before shale oil, Russia hadn’t diversified much into China or Asia. The Power of Siberian pipeline between Russia and China hadn’t been agreed on, let alone built. For Russia, shale gas was a geopolitical nightmare as the United States secured the capacity to export gas to Europe that would be cheaper than the gas Russia hoped to produce in the Arctic. Shale gas technology also opened up the possibility of more domestic European production, including in Ukraine, at a time when production from the North Sea was declining. Gazprom sought to keep as many European customers as they could at the same time as they attempted to prevent European shale production—including by supporting anti-fracking campaigns across Europe. 

The Middle East is more complex because the geopolitical dynamics in play between the US and Saudi Arabia in the 2010s were never just about energy. When the Arab Spring started in 2011, Syria descended into civil war and the US and Saudi Arabia were allied against Assad. That alliance held, despite Saudi frustration about shale. 

There were then two watersheds that strained the relationship between the US and the Saudis. The first was in September 2013, when Obama walked away from his red line about chemical weapons. The second was when the Saudis decided that they needed to bring oil prices down to improve their market share. The most obvious explanation of the Saudi oil move is that they wanted to hurt shale producers, but actually, there was some alignment of interests between the Saudis and Washington over using oil prices to shift Russia on Syria: If the combination of low oil prices and US shale gas hurt Russia significantly and forced it to scale back its commitments to Assad, the move might have improved the situation in Syria for the Saudis. But this didn’t happen: Russia proved able to withstand oil prices. In September 2015, the Russians military intervened in Syria. Meanwhile, US-Saudi relations deteriorated over the Iran nuclear deal. 

Could the Obama administration have played its hand differently? I think the answer is probably yes. Certainly the Americans could have been more sensitive to Saudi concerns about the nuclear deal, particularly given that it didn’t involve any restrictions on Iran’s activities in Syria. Obama could have been more careful about the way that he created that red line and then walked away from it.

NK: The book details how the American administration and a number of European governments drastically shifted their views on energy independence over the past three decades. Why was this the case?

HT: Obama was very adamant about the benefits of energy independence. Relative energy independence would allow for withdrawal from the Middle East and his “pivot to Asia.” In a 2016 interview with Jeffrey Goldberg, Obama says that his decision to walk away from the red line in Syria was a defining moment of his presidency. In his eyes, this was the moment in which he stood up to the foreign policy “blob.”

While relative oil independence may have given Obama a sense of freedom, he didn’t follow through on that judgment. He himself did not believe the US could withdraw from the Persian Gulf, the centerpiece of Western energy security. Beyond the Gulf, he simply wasn’t willing to let events take their course in the Middle East and say the US no longer has strategic interests in the region. In part this was because the credibility of American power still mattered. By 2014, he recommitted the American military not only in Syria, but in Iraq too against ISIS. 

NK: Given the geopolitical implications, is there an optimal balance between energy dependence and independence?

HT: Shale energy introduces a number of complications to this question—regarding the type of oil, the infrastructure and location for its refinement, and its domestic uses. Even though the US was exporting oil from 2015, it was still importing more. Given these complications, the entire concept of a country being able to achieve energy independence doesn’t make much sense. 

What I came to see in writing the book was just how troublesome shale energy was to the US, in the geopolitical sense, even as it reduced American foreign energy dependency. I anticipated the disruption it would cause to the relationship with Saudi Arabia, but the complex fallout of the competition with Russia in Europe took longer to see. Interestingly, the present moment echoes the oil-based competition between the US and Russia in the first part of the twentieth century. Ukraine was a fault line here both because there was some hope that Ukraine could develop its own shale industry and because Russia was pressing for more pipelines to bypass Ukraine, including Nord Stream 2. At the same time, the United States began to export gas to Europe. 

In one sense, I think shale complicated the US’ ability to make a geopolitical point out of Nord Stream because the Germans could argue, with some justification, that the Americans only wanted to sell more gas to Europe and that the pipeline was a pretext. If the US had focused only on where the pipelines were going rather than where European gas was sourced, it would have been easier to make the issue about Ukraine’s security. For the US, a reduced level of energy dependence and a resurgence of energy power clearly made some things easier. But it was not a panacea for anything. 

NK: No one fully foresaw the energy implications of Ukraine. Why have so many scholars and policymakers forgotten about the energy question?

HT: Beginning in the 1990s, Western politicians found it increasingly difficult to make arguments about energy. This is why we had these strange justifications for the Iraq war—I am reasonably confident it was largely an energy question that drove that war. And if we look at how the other geopolitical players, not least China, perceived that war, it was in those terms. Up until George H.W. Bush, American policymakers didn’t beat around the bush; it was very clear that American intervention in the first Gulf War was related to oil. I think the language of globalization and the optimism attached to the notion that geography could be transcended perhaps thereafter made talking about energy more difficult. 

The shift within Academia is more complicated. Energy was never that prominent in political economy scholarship, but it was there. As an undergraduate in the ‘80s, I had to demonstrate at least a superficial understanding of the oil price crash of the ‘70s. That started to change in the ‘90s, and, again, it came, I think, from the shift to the globalization discourse. Geopolitics was no longer supposed to matter. 

But it is an interesting question—I think why political economy scholars didn’t engage more with the energy implications of the 2007-2008 crash, even when oil prices reached historic highs in mid-2008. The crash on the energy side in many ways demonstrated the fragility of the American-led world order. Although scholars were interested in the China demand shock as evidence of a rising China, rather less attention was paid to the stagnation of supply, despite the geopolitical significance of the issues outside Russia and what Russia’s resurgence might mean.

NK: How does the story you tell in Disorder inform our understanding of the politics of central banks? 

HT: I am very skeptical about some of  the arguments that were made for central bank independence. It doesn’t make much sense that the primary lesson from the ‘70s was the necessity of central bank independence, given that energy inflation was at the heart of the inflationary crisis at the time. Today’s inflation has also reappeared on the heels of energy inflation, and central banks have to deal with it as if the issues are monetary-generated inflationary pressures that require central banks to be free from democratic pressures.

I also worry about what the Euro and Eurozone have done to democratic politics in Europe. I saw the removal of Silvio Berlusconi’s government in Italy in 2011 in part at the hands of the President of the European Central Bank (ECB) as a nondemocratic intervention. Mario Monti, who was much more friendly to the ECB, was then appointed Prime Minister. In writing Disorder, I came to see the relationship between the ECB’s quantitative easing (QE) programs and the question of who can exercise political power in Italy as pretty important. It is not really a coincidence that Italy has ended up with a non-elected former President of the ECB as Prime Minister at a time when the ECB has another QE program in place. 

I am not interested in defending Berlusconi, but the negation of democracy in Italy such that elections can only for short intervals determine who governs concerns me. Italy shows how technocratic claims can overwhelm democratic claims. I’m not necessarily critical of how central banks responded in 2008 with QE and asset purchase programs—it is quite difficult to see what else could have been done—but that doesn’t mean we should turn a blind eye to the problematic consequences, including in the Eurozone for democracies.

NK: You identify a longer trajectory of democratic erosion in international capital markets and debt issuance, especially in the 1990s and 2000s. If we had lower deficits, would we have the potential for greater democratic renewal?

HT: Debt places a really serious constraint on democratic renewal. Today, states can carry so much more debt than they ever would have thought possible. This new monetary world around debt makes democratic politics a lot easier, because economically dealing with various crises, like Covid-19, can be shifted onto central banks with no immediate consequences. 

There is something consequential in the fact that democratic governments had to let central banks take care of the crisis in 2008. Historically, politicians in representative democracies worried about whether democracies would be able to service their debt, hence their interest in citizens being creditors. Financial liberalization and international financial markets took care of that problem of democratic states being able to finance themselves in many ways, but this introduced a whole set of new problems, especially for southern European countries in the Eurozone. And additionally, there are banks’ vast borrowings to deal with. The state must be more responsive to bank debts than its own citizens’ personal debt and the government’s debt. A key example in the US is the scale and duration of the foreclosure crisis. The American federal government didn’t have to worry that much about its own debt and was indifferent to citizens’ personal debt, but it did have to worry about banks’ debts. This is another way in which debt makes the aim of democratic renewal—that would in some ways need to reduce the political importance and influence of banks—incredibly difficult.

NK: This is one of the ways in which contemporary politics are very different from the 1970s. How much can we learn by pursuing the 1970s comparison?

HT: I think it does make sense to think about the 1970s, if only to see what the differences are. For Western countries, the ‘70s shows that geopolitical shocks have energy consequences, which then in turn have more geopolitical ramifications as well as economic consequences. Energy shocks are systemic.

But it’s also wrong to say we’re going through the 1970s again. First, the bargaining power of labor has been significantly reduced since the 1970s. That means that the central bank or political response will be different—and it should be different. Second, oil was at the center of the energy shocks of the ‘70s. This time, we can see that it’s oil, gas, and coal. Third, there are supply side constraints now on fossil fuel energy and a demand shock, particularly on the gas side: China’s demand for imported gas in 2021 massively increased. The ‘70s saw geopolitical supply side problems, and this, because it involves supply and demand, is much worse. Finally, there wasn’t a serious attempt at an energy transition in the 1970s. Today, governments have to present a medium and long term plan for escaping fossil fuel energy, making political choices extraordinarily more complicated than they were in the ‘70s.

NK: One of the more controversial points of your book is at the end, where you suggest that a green transition will exacerbate the global fault lines you describe. What are we getting wrong? 

HT: The Green New Deal contains within it hopes that go far beyond energy: for an industrial strategy, for higher growth, and for some change in the distribution of incomes. Perhaps an energy transition can be a vehicle for these other ends, but it’s not going to succeed in those terms quickly. Indeed, the energy transition itself will likely not occur very quickly. 

The hopes for the energy transition also risks becoming a justification for not having to think about the problems that fossil fuel engines cause in their own terms. Supply is constrained in relation to demand, particularly with oil. The Green New Deal, I think, neglects these questions and leapfrogs directly to the alternative energy sources without facing the here and now. But we don’t know when the technological breakthroughs will occur for the energy transition to succeed. Until a decisive moment is reached with the tech transition, fossil fuel energies’ supply has to be faced. These internal fossil fuel energy issues cannot be dealt with in a haphazard way as if they will take care of themselves because we don’t want to be using oil and gas. 

There are dual crises going on—climate and fossil fuel supply. I think what is necessary are strategies that think about how the two crises interact, understanding that what you are doing for one will have likely consequences for the other. 

NK: You’ve called out the importance of low interest rates in facilitating the shale revolution. As these financial-energy linkages continue to shape global politics, should the Federal Reserve or the ECB recognize themselves as geopolitical players?

HT: The central bankers don’t talk as if they understood the geopolitical implications of their actions. Perhaps this goes back to the question of how we ended up with a technocratic policymaking apparatus, where energy was no longer on the visible surface of politics. The authority of central banks rests on the idea that there is nothing to debate about the purposes of monetary policy: In this view only technocrats should be deciding monetary matters. It supposes there is actually a political consensus when it is not so clear there is. Monetary policy was always supposed to be an issue about price stability, or in the US case, of balancing price stability and growth. But if you allow the possibility that the Fed is going to concern itself with America’s oil supply, and all its geopolitical consequences, it’s pretty difficult to sustain the depolarization narrative. 

What is interesting, however, is that in the last year or so central banks did take on the green transition language themselves. But I still suggest that they want to pursue the energy transition in a technocratic way, as if there’s a long-term political consensus about how to get there. The trouble is that the energy transition has distributional consequences. This latter part I think we now see very clearly.