The Energy-Price Roller Coaster

Most of the world’s energy supply still stems from the production and consumption of coal, oil, and natural gas. While the production and consumption of renewable energy — mainly solar and wind — has increased over the last decade, these sources of energy are still marginal to the global political economy.

Another point we need to stress to avoid confusion is that hydrogen and electricity are energy carriers, not sources of energy. In other words, hydrogen and electricity must be produced using some primary energy source, be it renewable solar and wind or nonrenewable fossil fuels. Moreover, both hydrogen and renewable energy are adding energy, not replacing fossil fuels, to supply the world’s energy grid.

As COVID-19 began to spread around the world in the first quarter of 2020, Saudi Arabia and Russia were embroiled in an oil price war. The price war and the pandemic led to oil prices plummeting to just $21 a barrel, and even saw crude oil futures enter a negative price territory for the first time in history.

Two years later, however, oil and gas prices are rising to near-historic levels in the wake of worldwide lockdowns. Energy experts expect a global resurgence in efforts to find and develop unconventional fossil fuel deposits, which are costly and usually located in ecologically sensitive areas. Coal production is also likely to rise.

The traditional way to explain these fluctuations in energy prices is by reference to the neoclassical law of supply and demand. Yet while supply and demand have something to do with it, energy prices are far more politically and socially determined than meets the eye.

Myths of Supply and Demand

More than a century ago, the economist Thorstein Veblen wrote a collection of papers, later published in 1919, entitled The Engineers and the Price System. One of the primary points he made was that prices are largely a matter of profit targets and institutional power rather than an equilibrium between supply and demand. Veblen recognized that firms charge what the traffic will bear and engage in strategic sabotage. By “sabotage,” Veblen chiefly meant the restriction of capacity — or the incapacitation of production, which amounts to the same thing.

This claim went against the prevailing theoretical logic of the time. Economists trained in the neoclassical tradition did not, Veblen insisted, have a correct theory of how commodity prices were set. His more mainstream counterparts attempted to argue that the price of commodities was the product of (1) their utility and (2) supply and demand. But can commodities actually be priced on the basis on their utility?

Utility is based on individual preference, which is subjective, and therefore cannot be measured in any precise way. For example, if a barrel of oil was worth $50 dollars yesterday and $100 dollars today, why the change? Did oil somehow double in its usefulness to everyone overnight?

The neoclassical theory of supply and demand has been debunked for some time, although this doesn’t stop experts and laypeople alike from conjuring up this supposed law to explain prices. In theory, if an equilibrium of supply and demand is what sets prices, there must be perfect competition among sellers. Everyone must be a pricetaker, meaning that no one has the power to dictate prices.

We know that this is not the case, and that large corporations are largely pricemakers rather than pricetakers. They anticipate a profit target based on the cost of their commodities and add a markup to achieve that target.

This does not mean they are always successful in their quest to achieve a certain degree of profitability, but there is no question that they seek to do so. Table 1, which shows the profit markups of the top fifteen firms from the Forbes 2000, illustrates the point.

This is especially true when it comes to the oil industry. A cartel of national oil producers united in the Organization of the Petroleum Exporting Countries (OPEC) largely controls the global supply of oil. The purpose of the organization is to strategically manage the production of oil — or in Veblen’s terminology, to strategically sabotage production when it suits its needs. OPEC controls four-fifths of the world’s remaining oil reserves, with the remainder controlled by nonmembers.

Layers of Causation

If supply and demand are not the only factors that can explain soaring energy prices, what can? Several factors determine the price of energy, which has posed a challenge to energy experts for decades. In relation to coal, gas, and electricity, analysts of global energy markets have pointed to the following culprits for rising prices: rapid economic recovery after the pandemic, a long and cold 2021–22 winter in the northern hemisphere, and weakened supply levels.

Until the Russian invasion of Ukraine, they mostly attributed the increase in the cost of oil to rising demand, as portions of the global population enjoyed greater petroleum-fueled mobility denied to them during the pandemic. That may be so, but we must remember that OPEC is restricting production as a matter of course to meet its own goals of profitability — an example of Veblen’s sabotage constantly in action.

Two additional factors are of note, according to the International Energy Agency (IEA). The first is the lack of investment in oil and natural gas due to commodity price collapses in 2014–15, and then in 2020, as the pandemic took hold of the world economy.

The political right often echoes this point about inadequate investment levels, claiming that a supposed left-wing obsession with climate change, net-zero targets, and renewable energy has contributed to rising prices, instability, and even national insecurity. They see the threat of climate change predominately as a hoax, and high energy prices as the result of government interference in the market. In line with this logic, right-wingers believe that the global energy system should be dictated by neoclassical economic fantasies of the apolitical world market rather than politics.

However, the second and more important point made by the IEA is that governments have not been forceful enough in their policies to encourage renewable energy to supplant the need for fossil fuels. This dearth of strategic investment in clean energy technology and renewables has perpetuated the global economy’s subordination to carbon energy prices, as we have seen most recently with the Russian invasion of Ukraine.

Russia is the world’s third-largest producer of petroleum and the second-largest producer of dry natural gas, according to the US Energy Information Administration. There is little doubt that disruptions in supply from Russia, whether for political reasons or otherwise, can cause overall supply to weaken and perhaps even dry up.

We know that the price hikes in energy, particularly for Europe, are partly due to the invasion of Ukraine, the sanctions imposed by Western states in response, and Vladimir Putin’s retaliation in turn. Russia is an energy superpower, and while it relies heavily on its EU customers for foreign exchange, it also has considerable room to maneuver as it seeks to diversify its customer base in Asia.

The Fire This Time

However, there is no reason why other states, from Saudi Arabia and Qatar to the United States, Canada, and Norway, cannot increase the supply of fossil fuels in order to help Western Europe and lower oil and gas prices. The fundamental problem is that big-energy interests can capitalize on these turbulent political times. This issue is often overshadowed by, or conflated with, a general picture of high inflation.

Thanks to the guidance of neoliberal economics, national governments and international bodies are addressing the rise in energy prices with inefficient, short-term policies. That primarily means subsidizing carbon-energy corporations in order to lower the price at the pumps and in the home. While the European Union has called for pathways to lower energy consumption and announced plans to apply a windfall levy on energy companies, it remains to be seen how this will be implemented and enforced.

Sadly, governments are also looking at new variations on the former Alaska governor Sarah Palin’s notorious slogan “Drill, baby, drill!” Another avenue involves figuring out how to get oil and gas from North America to Europe cheaply and quickly.

Looming ecological disasters and the global energy crisis reflect a wider systemic crisis that is rooted in the way much of the planet’s population relies on access to ever more energy for their lifestyles and reproduction. This global energy addiction could persuade public opinion to support both free-market political ideologues and the far right, which made a dramatic recent breakthrough in Italy.

The last time an energy crisis of this magnitude took place, we saw a dramatic shift from Keynesianism to neoliberalism. We cannot allow the response to this crisis to take the form of more neoliberal extremism or looming fascism. The biggest demand people should be making today is for their countries’ energy systems to be taken into public ownership. This would increase democratic oversight and develop a more robust democracy based on clean energy.

Beyond Carbon Capitalism

Energy prices are not determined by a simple mechanical dynamic of supply and demand but rather by a deeply political configuration of forces. One need only imagine what would happen if subsidies to the fossil fuel industry ended tomorrow, or if the real price of combusting fossil fuels — currently an “externality” — was included in the price that people pay to participate in carbon capitalism. What would the implications for our social order be if the true price of a gallon of gasoline was $25?

This leads us to an ugly truth for all those struggling for a better social order than one based on the logic of accumulation by any means possible, including the destruction of the biosphere. Karl Marx understood that a new order was always born within the womb of the old. Over the last three centuries, our rulers and captains of industry have constructed a built environment and world system based on the abundance, affordability, and availability of fossil fuels. This has allowed for the accumulation of capital on a previously impossible scale.

The working classes of the world should not lose hope and must continue organizing for a world beyond carbon capitalism, crass materialism, and the accumulation of capital for its own sake. But slogans, street protests, and calls for fossil fuel divestment will not be enough. The Left needs to seriously consider what a decarbonized social order would look like beyond the pursuit of exponential growth.

We are up against a civilizational order that took centuries to construct, and which cannot be dismantled overnight. In the meantime, a long-term strategy must guarantee a safe living space for future generations, and that means transitioning away from fossil fuels as fast as we can. There are no shortcuts here, only a tough slog to bring about a progressive social order of a kind that has yet to exist anywhere.