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Economics: Energy mercantilism —Majed Akhter

The machinations of giant economic actors on the global oil and gas scene suggest that with diminishing reserves of oil, the interplay between nature, state, and market will become increasingly complex, and deserving of scrutiny, in the decades to come

A development on the world economic stage has some wringing their hands in anxiety: the return of the State.

It was reportedly a hot topic at the World Economic Forum at Davos, and has been a prominent topic of discussion in international periodicals. The catalyst for the buzz is the high-profile activities in the West of sovereign-wealth funds, or government-owned investment funds, which belong to relatively poorer countries. Another arena where the State is re-emerging in a grand way is the oil and gas industry. The global hydrocarbon industry operates on a stage with the competing tensions of national sovereignty, capital accumulation, environmental urgency and developmental ambition.

Jeff Vail, an energy analyst, describes the phase that the world of oil is moving into as “energy mercantilism”. Mercantilism is an economic philosophy that rests on the idea that the amount of wealth in the world is limited; if someone is getting more, it must be because someone else is getting less. Mercantilism played a huge role in strengthening the hand of the European states during the middle of the last millennium — and was one of the early justifications for securing colonies.

The worry that oil is running out, with gas not far behind, has led to a situation where a perceived essential ingredient of economic growth is dwindling before our eyes. The aggressive manoeuvring of national oil companies (NOCs), especially Asian ones, a resurgence in resource nationalism, and a rush to secure oil by exclusive bilateral contracts are all rooted in the belief that energy will be very scarce, very soon.

Most economists would scoff at any suggestion that the creation of economic wealth can have bounds; if you innovate, it will grow. They would probably dismiss energy mercantilism as a temporary aberration from a self-correcting global energy market, and as foolish interventions by misguided states. But is the idea of limited wealth really so laughable?

A different interpretation of energy mercantilism can be found on the fertile periphery of economic discourse, in a sub-branch called evolutionary economics. Nicholas Georgescu-Roegen, the Romanian-born protégé of influential economist Joseph Schumpeter, is generally considered the founder of this branch of economics that questions some of the foundational precepts of orthodox economic analysis.

The basic thrust of evolutionary economics may not seem particularly remarkable: what has happened yesterday limits the course of action we can take today. This has always been known to economic historians, of course, but the way economies are usually modelled are unaccommodating to this intuition. Because factors that make up an economy, such as labour and capital, are determined simultaneously and are assumed to be infinitely available, it is as simple to move from any point representing the economy B to another point A, as it is to move from A to B.

Roegen argued that economies in the real world operated in a specific historical and geographical context, and that perhaps once you left A for B, there was no going back. To Roegen, the alarming and crucial insight to draw from this was with respect to exhaustible sources of usable energy.

He made the basis of his theoretical exposition the Second Law of Thermodynamics, which states that the entropy of a system, or energy unavailable for conversion to work, increases irreversibly over time. This means that once low-entropy sources of energy, which are easy for us to convert to work (like oil) run out, we will only have relatively higher entropy resources left.

By stressing the essentiality of natural resources to any economic process, and insisting that “cost consists in essence of low entropy, not of money, and is subject to the limitations imposed by natural law”, Roegen offered a theoretical framework from which to argue for finite economic wealth and the innately irreversible flow of socio-economic life.

Seen through this framework, energy mercantilism is not at all a surprising phenomenon. The concept of Peak Oil, that oil fields plateau and taper off till they die according to geological principles, fits neatly with evolutionary economics.

Faced with the daunting realisation that the most important fuel in the world is running out, and with no cheap alternative in sight, states have judged the task of cornering remaining reserves too important to be left to the market. Developmental states and their NOCs have moved strategically to book reserves, buy equity, and establish distribution networks in areas that will be crucial for hydrocarbon supply in the several decades, such as Central Asia and Africa. Russia and some South American countries are exerting increasing pressure on international oil companies and are asserting their sovereign property rights.

Energy mercantilism and resource nationalism are economic and political events that display mistrust of the distributional logic of the market, and acknowledge the essential role of energy in the modern economy. They are ways to secure access to scarce resources, not through market mechanisms, but by changing the rules of the game.

The oil and gas industry, because of its centrality to the material reality of the global economy, is an excellent place to feel out the eddies and currents that shape contemporary history. Sovereign-wealth funds, which have prompted so much concern in the international media, are just the tip of the iceberg. Morgan Stanley estimates that three-quarters of the world’s sovereign-wealth funds’ resources lie with oil and gas-related entities.

It’s interesting to realise that sovereign-wealth funds are a very market-oriented way to deal with the phenomenon of oil scarcity. The essence of the orthodox economic prescription for managing exhaustible natural resources can be summed up in the famous Hartwick Rule: to at least maintain the standard of living, invest all profit you make off exhaustible resources (which by assumption provide services that we can replicate) into something that will yield an adequate return.

That is exactly what many sovereign wealth funds are doing with oil profits. Energy mercantilism and sovereign-wealth funds that invest resource rents in the West both result from the increasing perceived scarcity of industrial capitalism’s lifeblood. Both represent the increasing role of the State on the international stage, but are markedly different in their approach.

The return of the State on the global economic stage after several decades of neoliberal dominance is prompting some to rub their chins wisely and to inquire whether one should consider the pendulum. But it is neither critical nor healthy to slip into prevailing discourse that describes history moving like a pendulum, from states to markets, from left to right, back and forth.

The fact is that both the concept of a “state” and a “market” are simplifications of how economic activity is coordinated and planned. Markets are always politicised, and global energy markets especially so. Moreover, with a nod to Roegen, all economic activity must respect the biophysical limits of Nature.

The machinations of giant economic actors on the global oil and gas scene suggest that with diminishing reserves of oil, the interplay between nature, state, and market will become increasingly complex, and deserving of scrutiny, in the decades to come.

Majed Akhter is a petroleum economist based in Karachi. He can be reached at majed.akhter@gmail.com. This is the first article in a two-part series. The concluding article will appear tomorrow

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