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Page added on June 26, 2016

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Brexit and the energy equation

Public Policy

The fretting in the financial markets after Great Britain’s voters narrowly decided to leave the European Union (EU), a move dubbed Brexit, was less about immediate effects–there aren’t any since it would take Britain up to two years to withdraw–and more about a foreboding that other countries will want out, too.

In addition, some think it likely that Scottish independence will once again be on the agenda. Scots were heavily in favor of remaining in the EU.

Centrifugal political forces are bad for business since they spell uncertainty and ultimately disruption if they come to fruition as they did in Britain regarding the EU. And, Britain, of course, isn’t the only country in Europe facing breakaway movements. The people of Spain’s Catalonia region have for some time sought a referendum on independence from Spain. Only last year Catalan separatists won a majority in the regional government. The movement cites cultural and linguistic reasons for independent statehood, reasons that could be asserted by many groups across Europe and lead to more instability.

The larger question is why there is building discontent with global economic and political integration not only in Europe, but also in the United States as evidenced by the candidacies of Donald Trump and Bernie Sanders.

The slim defeat for pro-EU forces has been explained as a vote against EU immigration and business regulation policies and against the loss of national sovereignty. But there is also a feeling afoot that the move toward greater integration through the EU and through global and regional trade agreements is designed primarily to enrich global financial elites–all the while subjecting middle- and lower-class wage earners to stagnant and even falling incomes as they compete against cheap labor in developing countries.

In the conversation about the rising revulsion against further integration, one factor is not being discussed: energy. With oil, natural gas and coal, the world’s primary energy sources, all far below their high prices of the last decade, all would seem well on the energy front.

Britain, of course, had been reaping the benefits of oil and natural gas deposits in its sector of the North Sea since the 1970s. However, after 2005 the country ceased to be a net exporter of crude oil and natural gas liquids. Imports of natural gas have risen steeply with 2014 imports reaching 19 times what they were in 2000. Both these trends point to the decline of the North Sea fields and Britain’s re-entry into the league of oil and gas importers, a sudden reversal of a previous long-term trend and a net negative for the British economy.

As you’ll see below, this trend combined with the effects of high energy prices on productivity growth had a negative effect on the incomes of middle- and lower-class voters who simultaneously paid a higher proportion of their incomes for increased energy bills. This double whammy has likely contributed to discontent among such voters who were looking for a way to express their frustration and found it in the Brexit vote.

Returning to the trends mentioned above, the year 2005 turned out not only to be an inflection point for the North Sea fields, but also for the worldwide oil markets. Prices rose inexorably and spiked in 2008 to their highest ever. After prices dipped to around $35 per barrel in the wake of the financial crash that followed, they rose sharply again regaining $100 by early 2011 and hovered around record average daily prices for more than three and a half years. The high prices were related to rising demand from Asia, but also to a dramatic slowdown in the growth of oil production worldwide.

If the cause of our current economic difficulties was, in part, high oil prices which slowed the world economy, then an energy connection comes into view. Current low oil prices become a symptom of economic weakness rather than merely a reflection of excess supply. (Much of the world outside of North America also experienced high natural gas prices during this period in the form of high landed costs for liquefied natural gas in Japan and Europe, far higher than the U.S. pipeline price during this period.)

Moreover, high energy prices in general can be linked to slower productivity growth. And, we have seen global productivity growth far below the expected trend since 2005, a year that was as noted an inflection point for oil prices. Now, here’s the important part: Productivity growth is the basis for rising wages. With declining productivity growth employers are less likely to raise wages as those raises would eat into profitability.

There are other reasons why wage earners may not be receiving wage increases, but lack of productivity growth is an important one.

So, here’s what all this had to do with the Brexit vote: Stagnant or declining living standards breed discontent among a populace used to rising standards. Pro free trade and economic integration forces argue that such integration into larger trading federations leads to greater prosperity. When the prosperity disappeared as it did in Ireland, Spain and Greece, significant political movements arose in the latter two (Podemos in Spain and Syriza in Greece) which question further integration and suggest at least substantial alteration of the terms of EU membership. The effect on British wage earners was more subtle, but found its expression in the Brexit vote.

Likewise, real American median wages have been generally slumping since 2007. The long-awaited recovery in wage growth has yet to appear in the United States even as a boom in oil and natural gas related to extraction from shale deposits boosted incomes in states where the boom occurred.

As in Europe, American voters have been looking for the reason for their declining prospects, and two candidates for president this year suggested a reason that makes sense to those voters: Global trade agreements have depressed American wages. Donald Trump said he would “renegotiate” the North American Free Trade Agreement (NAFTA). Bernie Sanders outright opposed NAFTA in 1993 while a congressman and continues to oppose agreements he believes punish domestic labor.

While supposedly unfair trade and financial agreements may be a cause for the decline of middle- and lower-class fortunes, they cannot be the sole cause. That’s because wage stagnation began long before NAFTA and long before the introduction of the Euro.

It’s instructive to note that in the United States median hourly wages leveled off in 1973, the year of the Arab Oil Embargo. Energy costs in the United States rose dramatically after that though they returned to lower levels in the 1980s and 1990s. Still, the country was increasingly dependent on foreign oil and sent more and more of its income abroad during this period to pay for that oil. During the recently expired oil and natural gas boom in the United States, high prices enriched those involved while transferring wealth from those who weren’t. The effect on overall wages seems to have been slightly negative.

None of this definitively proves that stagnant wages are caused by high energy prices, increasing energy imports or skewed trade agreements. But there is strong evidence that all three are implicated. Not surprisingly, energy is the theme that is being neglected in this discussion because energy is currently in a cyclical price trough, one that may very well have resulted from the dampening effect previously high prices had on economic and productivity growth.

Such effects are hard to pin down. And, the mythology brought to us by the public relations arm of the fossil fuel industry is that we need not worry about sufficient energy supply–a story they’ve been touting since the lows in oil prices in 1998. Every step of the way on the path to the price spike of 2008, the industry said big new supplies were just around the corner.

When a special kind of hydraulic fracturing made new oil deposits available in the United States, only prices near $100 a barrel made them economical (as we can see by the widespread bankruptcies among those companies reliant on such deposits in the recent low-price environment).

It’s those high prices which I believe have slowed the economy making oil now seem temporarily plentiful. If we don’t go into a major recession or depression, a rise in demand could send prices soaring and put further pressure on overall productivity growth while increasing energy bills for households. That would set the stage for more discontent among those who believe that increased economic global integration is hurting rather than helping them.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Resource Insights



27 Comments on "Brexit and the energy equation"

  1. St. Roy on Sun, 26th Jun 2016 11:20 am 

    Hi Kurt

    You connected the dots! All the political chaos going on in the world is definitely the result of the end of cheap oil. It’s only the beginning

  2. Cloud9 on Sun, 26th Jun 2016 11:54 am 

    Things evolve from the simple to the complex. When they reach the apogee of complexity, they devolve.

  3. Plantagenet on Sun, 26th Jun 2016 1:27 pm 

    1. A 4 point victory for “Brexit” is not a “narrow” victory. Thats a pretty convincing win.

    2. Its unlikely that the next British PM will allow Scotland a do-over on their independence vote. The Scots voted wrong—too bad.

    3. Cobb’s claim that shale oil is only economic at prices over about $100 bbl is out of date. Production costs have fallen dramatically and some shale oil is now economic at much lower prices.

    4. Cobb is right, however, that both the US and UK (and the EU itself) is facing discontent due to stagnant wages. This discontent has been muted in the US due to the weirdly convoluted way the BLS counts unemployment (according to them we are at full employment right now—hahahah!) and the non-stop cheer-leading by Obama who claims he has “fixed” the economy. Fortunately, Bernie Sanders had the courage to tell that truth that the economy has been rigged by the neoliberal to favor big business and the Wall Street banks!

    Cheers!

  4. joe on Sun, 26th Jun 2016 1:42 pm 

    Thus is the quandry for EU policy vis a vis Brexit. The crying whining liberals attempts to deny the will of the people aside (the short time after a vote and the adjustment to the cognitive dissonance is usually the most dangerous ). The EU faces the question of whether or not to support a successful England and Northern Ireland in the decades ahead. If they are successful then that shows a country can go it alone. If they resist success then they will incur the emnity of a regionally powerful player. Its a real issue. Guess a mix of wind solar nuclear and fracking will probobly allow the UK to survive post Brexit, I also guess the whole world faces the same issue. In a future of low growth low prospects and aging population, things like liberalism and toleration and integration are a good distraction from the message of reality that an aging western population of low birth rate is going nowhere fast. Millenials like to be fooled by the idea that the old and racists are the ones jeopardising their future. But really its Billary and the third-way neoliberals who agreed with Reganism and NAFTA but hated the neoconservatives. Blairites in the UK fit that mould and their legacy has been war and a refugee crisis that took the UK out of Europe. I guess Saddam won the war afterall.

  5. Boat on Sun, 26th Jun 2016 2:18 pm 

    The voters in the UK don’t want to support poor countries the EU. They don’t want immigration. Trump is feeding off the same sentiment in the US.
    After the crash unemployment in the US went to 12 percent. What was the response? Keep immigration levels close to 1 million per year. High unemployment recovery was slowed along with wages. If we had not allowed immigrants we would have a shortage of workers and rising wages.

  6. Davy on Sun, 26th Jun 2016 6:12 pm 

    “Dow Futures Down 900 Points From Pre-Brexit Highs, Plunge Below Friday’s Crash Lows”
    http://www.zerohedge.com/news/2016-06-26/dow-futures-plunge-open-below-fridays-crash-lows

    “*IMF’S LAGARDE SAYS MARKETS HAD VASTLY UNDERESTIMATED BREXIT
    *LAGARDE SAYS NO PANIC DESPITE MARKETS UNDERESTIMATING BREXIT
    *LAGARDE: UK, EUROPE OFFICIALS HOLDING UNCERTAINTY IN THEIR HAND”

  7. Truth Has A Liberal Bias on Sun, 26th Jun 2016 6:21 pm 

    @Plant

    Cobb wrote

    “When a special kind of hydraulic fracturing made new oil deposits available in the United States, only prices near $100 a barrel made them economical”

    That statement refers to the past not the presence. The word “when” is past tense and the word “made ” is past tense.

    So at the time, several years ago, when a special kind of hydraulic fracturing made new oil deposits available in the United States, only prices near $100 a barrel made them economical.

    That statement is correct. However your point that prices have come down since then is weak. The best of the lot breaks even at the well head at about $61. Last time I checked nobody is moving head office to the well head and nobody infests money to break even.

    Shake oil is hype. A comparison of corporate statements made to investors vs filings made with SEC will highlight the bullshit if you care to look it up. But I doubt you will. You’re not interested in facts. Neither are any of your fellow retarded countrymen.

  8. Sissyfuss on Sun, 26th Jun 2016 8:16 pm 

    Truth says, “infests money”. Unwittingly brilliant!

  9. Ralph on Mon, 27th Jun 2016 3:36 am 

    Plant, a (less than) 4% margin IS a very close margin.

    3,621,200 people and counting (about 12 people a second) have signed a petition in the last 3 days, calling for the referendum to be re-run.
    That is 6% of the population.

    There is a lot wrong with the EU, it is run by the 1% for the benefit of the 1%, but it also does provide a lot of stability, inward economic investment, and strong environmental and worker’s rights legislation.

    The UK is now in a political and economic vacuum. The Brexit campaign was orchestrated by right wing political opportunists who saw it simply as a way of increasing their share of the 1%’s gravy train. They are now floundering, and both major political parties have imploded.

  10. Bystander on Mon, 27th Jun 2016 5:51 am 

    City of London meltdown begins:

    https://twitter.com/wmiddelkoop/status/747376003304001536

  11. Bystander on Mon, 27th Jun 2016 5:57 am 

    That’s not me saying that but self-described “rechtse joodse jongen” (rightwing jewish dude) Willem Middelkoop, the Dutch Peter Schiff.

    I have several books from him, about peak oil as well as global bestseller The Big Reset.

    He is very popular in China, wonder why that is.

    Several English spoken talks on youtube about the immanent financial collapse.

    He is a selfmade man and made millions with… surprise, surprise… with gold trade.

  12. Davy on Mon, 27th Jun 2016 6:43 am 

    We are not seeing a route yet but I suspect we may see a gathering storm as global investors digest this event and new an unpredictable risk surfaces. This is the problem with an unhealthy system that has been repressed and manipulated. Risk has been spread throughout the system in multiple areas leaving a condition of blossoming. The rain has fallen and now problems that were seeds cast in past years are going to sprout in likely places and unlikely. I suspect the authorities will be gearing up with all kinds of plunge control assets. We know they can enter the markets and buy and sell. We know they can strong arm and talk to the markets. We still have helicopter money option. These are longer term issues that now surely are set in motion. In the next few days the key is confidence and herd direction. I see building carnage over the rest of the summer.

    “European Stocks, US Futures Extend Slide On UK Chaos, Pound Carnage”
    http://www.zerohedge.com/news/2016-06-27/european-stocks-us-futures-extend-slide-uk-chaos-pound-carnage

    “With global asset correlations once again approaching 1, overnight stocks have been trading in broadly “risk off” mode, following every twist of pound sterling and the rapidly deteriorating British financial situation as “chaos infects” virtually all markets, from China, to European banks, to US equity futures.”

    “China Devalues Yuan Most In 10 Months As Premier Li Warns Of Brexit “Butterfly Effect” On Financial Markets, Economy”
    http://www.zerohedge.com/news/2016-06-26/china-devalues-yuan-most-10-months-premier-li-warns-brexit-butterfly-effect-financia

    “In a somewhat shockingly honest admission of the frgaility of the global financial system, Chinese Premier Li warns that a disillusioned British butterfly has flapped its wings and the entire global financial system could collapse.”

    “While Chinese stocks remain ‘stable’ (despite Goldman suggesting more pain is due – regional cost of equity to rise 50-75bps as risk appetite shrinks after Brexit, equal to 5%-10% index decline), the less managed rest of the world is struggling and China knows it…Premier Li Keqiang said an increase in instability in a particular country or region could trigger the “Butterfly Effect,” which could, in turn, affect the global economic recovery and financial market stability, according to comments posted on Chinese central govt’s website. All economies highly dependent on each other and no country can manage alone, Li said during meeting with WEF executive chairman Klaus Schwab in Tianjin.”

  13. Bystander on Mon, 27th Jun 2016 6:51 am 

    To illustrate that we are sailing into a new world, RT can’t hold back its schadenfreude and use ver crude language borrowed from William Shakespear/Merchant of Venice to make an insider’s quipe to illustrate that the NWO is sinking:

    “Soros didn’t get his pound of flesh, this time around”

    After being tortured for decades in the USSR, Russians understand the essence of the NWO much better than the average American.

  14. Bystander on Mon, 27th Jun 2016 6:54 am 

    The link:

    https://www.rt.com/business/348537-soros-bet-gold-pound/

  15. Croatian Holiday Maker on Mon, 27th Jun 2016 10:34 am 

    hahahaha

    http://www.spiegel.de/politik/ausland/bild-1100033-1015201.html

  16. Croatian Holiday Maker on Mon, 27th Jun 2016 4:33 pm 

    Brexit #2

    Iceland-England 2-1

    Watched the game between a 100% Icelandic and a majority African “English” team during a public viewing on a central square in a little town at the Dalmawtion coast with ca. 200 viewers, mixed Croatian and European tourist.

    Everybody cheered the Icelandic team, part because of sympathy for the underdog but also because of the Brexit last week.

    “You no longer belong with us.”

  17. Croatian Holiday Maker on Mon, 27th Jun 2016 5:46 pm 

    AAA –> AA. S&P kicks Britain two grades from the credit worthiness ladder with warning that further degradation is possible.

  18. makati1 on Mon, 27th Jun 2016 7:17 pm 

    Croation, those rating agencies are a sick joke. NONE predicted the past 15 years accurately. NONE.

  19. Croatian Holiday Maker on Tue, 28th Jun 2016 12:42 pm 

    makati1, Britain is a friend of the raters, that’s the difference.

  20. PracticalMaina on Tue, 28th Jun 2016 2:31 pm 

    Isn’t a majority of the worlds wealth still sitting in London….. in a private family vault?

  21. makati1 on Tue, 28th Jun 2016 5:37 pm 

    Croatian, still, a AA rating for a country that is in recession is too high. But, you are correct. They should be near the bottom except for their rater “friends”.

  22. makati1 on Tue, 28th Jun 2016 5:38 pm 

    Practical, do you mean the Rothschild trillions? Could be, but I think it is in many investments scattered across the world. Doesn’t matter. It won’t buy back the extinction of their family and the rest of humanity.

  23. Apneaman on Tue, 28th Jun 2016 6:03 pm 

    mak, I have a AAA rating.

    Always An Asshole

  24. makati1 on Tue, 28th Jun 2016 9:24 pm 

    Ap, Hahaha. Thanks for the chuckle. We probably all rate that at one time or another.

  25. Croatian Holiday Maker on Tue, 28th Jun 2016 9:42 pm 

    makati, the adres of the holding that controls most of Rothschildt’s wealth is in Amsterdam:

    Concordia B.v, Apollolaan 133 – 135, 1077 AR Amsterdam

    In an average Dutch house, see Google Streetview.

    Amsterdam was the town where it all began for these people in the 17th century.

    Anglosphere was born in Amsterdam, that’s were Protestantism celebrated it’s first major victory. With it came freedom of religion, which attracted these people from Spain to the Netherlands. They than financed the Dutch military conquest of Great-Britain and Northern-Ireland of 1688, which made a protestant country out of Britain. In exchange they were allowed to run the national central bank.

    And thanks to the Netherlands they entered America even earlier, much against the will of America’s first politician Peter Stuyvesant.

  26. makati1 on Tue, 28th Jun 2016 10:51 pm 

    Whatever. They will die along with the rest of us, and if there is a Hell, they are all destined for it.

  27. Princeton University on Tue, 7th Feb 2017 3:47 pm 

    It’s surprising to find on peakoil.com a resource so precious about equations.

    We will note your page as a benchmark for Brexit
    and the energy equation .
    We also invite you to link and other web resources for equations like http://equation-solver.org/ or https://en.wikipedia.org/wiki/Equation.
    Thank you ang good luck!

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