By John Robinson*
October 6, 2006

1. The future of the planet is back on the agenda. Al Gore’s film suggests that global warming is the greatest threat facing the human race, and Tony Blair says much the same thing. This is an important issue, but not the only one. There are others of similar global scope such as extinction of other species, limits to water and food production, starvation of billions, and the consequences of such disruption.  Ideally we should get to grips with the whole mix.  We look at a few pieces of the jigsaw here, the connection between oil price increases and the global economy..

2. The opening up of the question of the future of the planet takes us back in time, to 1968 when the Club of Rome was formed, to 1972 when “The Limits to Growth” was published, and to the years of the Commission for the Future.  The debate builds on many other works over centuries, past concerns of William Morris and Henry Thoreau in the 19th century to Rachel Carson’s 1962 warning of “The Silent Spring” and the more modern global models of the 1970s and 1980s.  Most of that concern, which was felt to be so vital in the 1970s, has been ignored, but after 30 years of denial the chickens are coming home to roost.  We are entering into the forecast crunch period.

3. With all the complexity of the world, is there any one factor which dominates to the extent of determining the response to the challenge?  My answer is yes, historian Fernand Braudel’s ‘mysterious realm’ of high finance.  This mysterious realm has always been there - histories throughout the past millennia tell how any king or emperor wanting to go to war needed to take out a loan to finance the enterprise – and how each turned to the financiers of the day.  Access to sources of money has often been key and we should understand how such a system behaves.

4. There are patterns in the behaviour of large-scale economies which repeat over time.  Marx thought that growth would lead to overshoot and then decline, collapsing capitalism and leaving the way clear for the birth of communism.  That overshoot and decline had been observed many times before.  Indeed it is interesting to consider some economies which have lasted longer and ask how they dealt with excess capacity – the Egyptians by building massive tombs for millennia, middle ages Europe by building those magnificent cathedrals.  Perhaps that is the role of the military and the prisons in modern America?

5. In the USSR in the 1920s an economist, Kondratief, came up with a further development of Marx’s theory.  He noted that many such growth, overshoot and decline patterns had occurred, and suggested that capitalism might not be brought down but rather that large-scale economies follow a cyclical pattern – now known as Kondratief cycles, which have been widely studied since. Growth is here followed by overproduction and excess capital, then closure of many enterprises and a feedback which causes a systems collapse.  Such a crash occurred in 1929-1933.  There was a further growth (recovery) period in 1940-1970.  Then the process began to repeat, and during the 1970s there was widespread overproduction. Excess capital was touted to countries across the world, and some such as India were criticised for refusing the money on offer.  BUT there was no crash, due to a number of factors including the redistribution of the welfare state, the actions of the World Bank, the creation of additional demand and gobalisation which brought new regions, at different stages of development into the system.  The world has for some decades since been characterized by overproduction (excess capacity) and excess capital.  The controllers of high finance are dominant – particularly in their influence on political ideology. 

6. I have described this process in my 1989 book “Excess capital”.  This is what globalisation is all about, providing a hunting ground for recycling capital.  Historically this is a common story as economic growth leads to excess and a search for further markets, coupled with a struggle for hegemony as witnessed in the British and other empires, two world wars (when Germany fought for European hegemony) and the dominance of the American global superpower, with and colonisation with its recent form of neo-colonialism.

7. At the same time that much of the world became ‘overdeveloped’ there have been significant changes in oil resources - including both measurements and denial of physical limits. When in 1956 Hubbert forecast a peaking of USA oil production around 1970, he was laughed at.  However the real world did follow his forecast.  The end of oil exports from the USA paved the way for OPEC action and the oil shocks of the 1970s coincided with the era of overproduction. Petrodollars joined other masses of excess capital, to influence most national and global actions since. 

8. While that process was proceeding, and before it reached its apogee, there were a number of studies of the evolving situation for the Commission for the Future. After George Preddy had noted that oil jumped from 15% of imports in the first quarter of 1979 to 24% of imports in the first quarter of 1980, I carried out a number of model experiments using the SARUM global model which had been chosen by the East-West Center in Hawaii and by OECD Interfutures as the best global model available and disaggregated so that New Zealand appeared as a separate region.   One model run followed the doubling which occurred in 1979 and a further doubling in 1985-86, as an investigation of the likely consequences of such a happening.  The model indicated an increase in the negative balance of payments from 1% of GDP in 1970 to 5.2% of GDP in 1980 and 15.3% of GDP in 1990.  A feedback mechanism operated so that an increased oil price led to devaluation of the New Zealand dollar and thus a higher oil price in the NZ dollar.  The economies of a number of oil-importing countries were hard hit, much more severely damaged than in the 1970s.  This would suggest that a major impact of an oil crisis, as forecast in the coming several years, would be to the balance of payments and the New Zealand economy.

9. I always like to test whether my picture of the global economy is supported by recent happenings – which would be expected if the model is robust.  As usual there are many good examples in the recent media.  I found several references to overproduction in the car industry – Ford could lose as much as $9 billion, Daimler-Chrysler has losses of $1.2 billion for the third quarter, Renault, Volkswagen and Peugeot have been hit by tepid sales.  We may ask what will happen as the oil era ends?  Some very big enterprises may go under.  (Guardian Weekly September 22-28 page 10l, Economist September 2 page 50)  It is easy too to find references to excess capital.  Thus from the Guardian Weekly: “The grotesque imbalances in the global economy, and the crucial part access to cheap money has had in underpinning growth, particularly in the United States and Britain, suggest we take the [situation] seriously.” (September 22-28 page 10)  And the Dominion Post, of New Zealand: “The large amount we have borrowed during the past couple of decades from overseas mostly has funded additional consumption.  If anything investment levels have been a bit below the OECD average.  While paying away 7 per cent of our income to non-resident lenders may not seem a lot, it is a drag on our standard of living.” (Dom Post Saturday September 23)

10. New Zealand, like the USA and Britain, is borrowing heavily.  Indeed there has been a big shift in the flow of funds since around 2000 which is when the New Zealand economy started to pick up and unemployment started to drop.  According to The Economist (September 2 2006), since 2000 borrowers have tended to be the high GDP countries and lenders the low GDP countries.  That is the world we now live in.

11. Recently Massey Professor of Banking David Tripe told the Futures Trust of flows of capital into housing.  Here Petrus Simon outlines the New Zealand situation and relates this to the likely oil price rises of the coming few years.