The price of a barrel of oil was up past $53 (U.S.) early this week. Was that good news or bad news? The usual answer is that it’s good news if you produce oil, and bad news if you consume it. But that answer will not do today. Oil is a bigger story than who wins when the price goes up.
The post-war boom was fueled by cheap oil. During the 25 glory years of capitalist expansion, from 1949 until 1973, the price of oil remained at $3 a barrel. This was no accident. Seven major oil companies, the so-called seven sisters, controlled the price paid to oil producers. They could do this because they controlled the distribution of petroleum products.
It was John D. Rockefeller, Mr. American Capitalism, who figured out how to take the profits away from the small companies who found the crude and drilled the wells. He became the middle man. Rockefeller transported the petroleum to refiners and then to market. Not content with the biggest share of profits, he used his control of distribution first to bring the small producers to their knees, and next to take them over. When he was finished he played out the same scenario with refiners and retailers. In the process Rockefeller created Standard Oil, a monopoly that eventually got broken up. It became five of the seven sisters.
In 1973 the Organization of Petroleum Exporting Countries (OPEC) decided to increase the price of oil. It went from $3 to $12, a fourfold hike. A second increase in 1979 sent oil to $36. As a result, the low cost component of industrial production was lost. In the ensuing scramble, those who could increase their prices did, and those who could not pass on the higher cost of petroleum went into debt, or curtailed purchases. A new word, stagflation described the simultaneous economic stagnation and increase in prices.
OPEC had reckoned it was time to reverse the dominance of industrial consumers. Oil prices should reflect the cost of substituting the energy equivalent of a barrel of oil, for a barrel of oil. Against the usual economist argument that oil prices should reflect the variable forces of supply and demand, OPEC could point to 25 years of stable, controlled prices. It wanted to drive the cartel that set that price, and take a bigger share of oil profits, not use a day to day pricing mechanism to price a nonrenewable resource. For OPEC the value of diminishing oil reserves was better tracked by the substitution principle.
Oil is an issue in Canada right now. In his keynote address to the Liberal party convention, Michael Ignatieff took a peek at the energy file. A strong federation required the ability to share the proceeds of resource endowment, he argued. Very true. But whereas Ignatieff had in mind sharing between levels of government, the real issue is how citizens share resource wealth.Citizens are the ultimate owner of the resource. In Alberta, the government has been selling off the birthright of Albertans to the producers, largely American owned oil companies. It will be interesting to see if Nova Scotia and Newfoundland governments do better.
In the meantime a broader issue has been identified and is being debated by people such as McGill economist R.T. Naylor. Can the economic model based on the burning of greater and greater amounts of hydrocarbons be sustained? Or will ecological collapse intervene before international society realizes the folly of current industrial and consumer practices?
Canada tied itself to the American model of resource exploitation when it signed on to the Free Trade Agreement in 1988. The real resource issue is what kind of economic model can be envisaged other than the one that is currently burning up the atmosphere as fast as we can produce and ship oil and gas.
Without a new economic model, the oil and gas addiction will do us all in.