One fascinating element of the story that takes place before the events described is the role oil played in World War One. There was a British comic who did a whole bit about how World War One was caused by the Berlin-Baghdad railway. That's certainly an exaggeration, but oil politics did play a role in the conflict.
When he was the Secretary of the Admiralty, Winston Churchill moved to use oil rather than coal as the primary source of fuel for ships. His calculation had less to do with energy density, and more to do with removing the stranglehold that labor had over the economy.
In this short, rousing speech, Tony Benn gives a great overview of the changes that have taken place. He talks about how Neoliberalism intentionally broke the choke points the working class had over the economy. From my reading of history, capitalism does not lead to working class prosperity through "trickle-down," but rather working-class immeseration and instability. This leads to militant worker strikes and it is these which lead to raised living standards for the masses, not the "natural workings" of capitalism's invisible hand as economists would have you believe. But economists only deal with bloodless equations and "timeless laws" and ignore any history which does not comport with that. But I digress.
Tony Benn’s Ten Minute History of Neoliberalism (Naked Capitalism)
Plus, the internal combustion engine (especially diesel) is what powered tanks, jeeps, airplanes, and submarines, and those run on oil, not coal (coal-to-oil was developed by Germany during WW2 to bypass this). Military leaders knew that these were the future of warfare and necessary for military power. No military power could remain so without reliable access to petroleum. So even though coal was still the major power source by 1900, getting access to oil was already a driving factor in geopolitics by that time.
As "Carbon Democracy" points out, not only was control over a coal a major factor in expanding working-class power and the franchise, removing working class power was a major incentive for the shift to oil. You could just stick a straw in the ground, gush out the liquid, hire cheap foreign workers to put it in a pipeline, and ship it to your ports. That allowed you to break working-class power. It's not for nothing that Thatcher called coal miners "The enemy within."
The U.S. was in an interesting position. It was actually the world's largest producer of oil during this period. Britain did not have the knowledge or technology to get at the North Sea. Much of the partitioning and artificial borders of the current Middle East were drawn up specifically with the objective of access to oil in the wake of the decay of the Ottoman Empire. And Saudi Arabia, being outside of the old Ottoman empire, was unaligned, which led to Franklin Roosevelt traveling there and beginning the special relationship of the United States and Saudi Arabia. The Bush family for example, is intimately intertwined with the Saud family. It's likely that Reagan's oil strategy was masterminded by his vice president:
The close relationship between the US and Saudi Arabia goes back 60 years, but what engendered its special intimacy was the oil crisis of 1973. From 1970, American oil production began to fall and the country was increasingly dependent on foreign supplies: Saudi Arabia became critical to the maintenance of the American way of life. A large proportion of the petrodollars that flowed into the coffers of the Saudi royal family as a result of the oil price hike were invested in the US. Unger estimates that, since the mid-70s, 85,000 super-rich Saudis have invested the staggering sum of $860bn in American companies. Houston, the oil capital of the United States, has benefited more than any other city and now has a significant Saudi presence.Review: House of Bush, House of Saud (Guardian)
The Bush family has enjoyed a long connection with oil: George Bush bought an oil company in the 1950s and sold it, at a handsome profit, a decade later. His confidante and lifetime collaborator, James Baker, was similarly connected with oil, being a partner in Baker Botts, a big Houston law firm that represented oil-industry interests. When Bush began to put together his presidential team in 1978, it was based on a new political network in Houston, that of Big Oil (his son's administration has taken this much further, nakedly representing the oil industry like never before). Not surprisingly, this slowly became enmeshed with Saudi interests, which, especially in the figure of Prince Bandar, a member of the royal family and for many years the Saudi ambassador to the US, slowly and painstakingly sought access to the American political elite - most successfully of all with the House of Bush. Prince Bandar, for long the central Saudi figure in the US, hugely rich on his own account, has been a close confidante of George Sr for two decades.
George Jr trod a not dissimilar path, establishing his own - albeit not too successful - oil company in the late 70s, until bought out by Harken Oil, of which he became a director; when Harken, too, was saved from extinction by a very wealthy Saudi investor, George Jr was one of the beneficiaries. The same wheels within wheels were turning. Unger is interesting on the differences between father and son. George Sr was a product of the East Coast establishment and later adopted Texas as his home. In contrast, George Jr was unashamedly, brazenly even, a Texan, born and brought up in American's oil state. The misperception of what he would be like as a president had much to do with his father's reputation and experience, which was largely to prove a false lead.
The US-Saudi relationship blossomed in the context of two crucial wars, both of which the US fought by proxy: the Iran-Iraq war and the Afghan war. The American administration was deeply concerned about the impact of Ayatollah Khomeini's Islamic fundamentalist regime in Iran - previously the US's most powerful ally, Israel apart, in the Middle East. It used Saddam, in strategy well detailed by Unger, as a means by which to counter the Iranian regime, secretly supplying him, for a decade or more, with weapons and cash. The Saudis - who effectively replaced Iran as America's regional ally - were intimately involved in the intricacies of American policy, even coming to the aid of the Americans by secretly funding - at the Reagan administration's request - the Contras in Nicaragua after Congress had blocked presidential support.
Unlikely as the American-Saudi alliance might seem, during the cold war there was a mutual sympathy. Of course, the central component was, and remains, one of raw, elemental interest. The US depended on a reliable supply of cheap oil - for which the Saudis were utterly crucial - while the Saudi regime needed a military guarantor for what was a deeply insecure regime in a profoundly unstable region. Both regarded the Soviet Union as the infidel: albeit for the Americans a secular one, and for the Saudis religious. These interests coincided most closely in Afghanistan.
The Saudis became enthusiastically involved in the American-inspired covert funding of, and support for, the mujahideen war against the newly installed Soviet-backed government. Strangely, 10 years before the end of the cold war, the conflict was to prefigure the future course of events, on the one hand the collapse of the Soviet Union and on the other hand the emergence of al-Qaida and Osama bin Laden. The Afghan war was to be the Soviet Union's Vietnam while for Bin Laden, a member of one of Saudi Arabia's elite families, who were intimately connected with the House of Saud, Afghanistan became the Islamic equivalent of the Spanish civil war, a mobilising cause across the Muslim world, especially the fundamentalist part, and above all in Saudi Arabia: indeed, the House of Saud found the mujahideen crusade a useful way of asserting its own militant Islamic credentials and appeasing domestic opinion. So al-Qaida was forged in the crucible of the Afghan war.
Fortunately, I can outsource this one. See this:
The First World War for Oil 1914-1918: Similarities with the 2014 Oil Wars 100 Years Later (iakovos alhadeff)
Hidden Motives: An Exotic Railroad and a rapidly expanding Global Oil Economy (Revisionist)
Britain Vs. Germany, Coal Vs. Oil & The Coming Of The Great War and Following The Tracks To War - Britain, Germany & The Berlin-Baghdad Railway (OilPro)
You're also struck by the zero-sum nature of this whole situation, despite assurances that economics is purely a "positive sum" game where we're all better off. High oil prices make oil exporting countries rich by making importing ones poor. This has all sort of chaotic effects. Low prices cause oil- exporters to become destabilized but give a boost to workers in industrialized countries. Oil prices go down and central banks defend their currencies' value. They go up and everyone simultaneously tries to weaken their currencies to stimulate their economies.
And you're struck by how crazy the whole currency floating system is. An entire economic regime based on "traders" and central governments basically buying and selling debt and trying to preserve the value of pieces of paper and computer bits that seem unmoored from the real world. One bit that got left out of the analysis of today's economic situation was this article from David Cay Johnston explaining the situation: Currency wars and the threat of deflation (Al Jazeera):
More than a fifth of American trade is with China, so the relative price of the yuan and dollar matters a lot to both countries. A cheaper yuan helps China export more manufactured goods, because Americans (and others) can buy them at lower cost. This also means it will cost the Chinese more to buy American products, so fewer will be sold.Yikes! Johnston points out that everyone trying to make their currencies cheaper to increase demand for their currency and make their exports cheaper leads to falling resource prices, which raises the potential of deflation:
In June China sold $1 billion per day more to the U.S. than it purchased. If the yuan falls 10 percent it, will make Chinese goods so much cheaper that our trade deficit with China will likely increase by about $66 billion annually. That translates into a likely loss of 190,000 to 640,000 American jobs...Since 2000 the U.S. has lost more than 5 million manufacturing jobs, the majority of them to China.
The U.S. could stanch this by buying yuan for, say, 5 to the dollar. At that price currency traders would be hunting for every Chinese coin stuck between couch cushions. Chinese leaders would not take well to this and would, in turn, come up with their own responses to mitigate the effect of such a currency war because their interest is fixed on China’s long march to becoming the next superpower.
But it’s not just China that is devaluing its currency so it can lower the price of exports. The South Korean won, Thai baht and Malaysian ringgit have all come down in recent days and the Vietnamese dong is sure to follow as these countries try to make their exports cheaper and protect their manufacturing jobs...All this makes the dollar relatively stronger, which reduces American exports and manufacturing jobs.
For the U.S. the stronger dollar will also put even more downward pressure on wages as manufacturers try to find ways to make products competitive and overcome the stronger dollar. That would in turn worsen the already weak spending capacity of most Americans, adding to deflationary pressures as sellers trim the prices of goods and services.
Another way to make the dollar cheaper is by lowering interest rates — except that they are already so low...The Federal Reserve keeps hinting it will abandon its zero-interest-rate policy as early as this fall. But lifting interest rates will make the dollar even more attractive as a safe storehouse of cash. So higher interest mean an even stronger dollar as more money flows into American debt securities, which means fewer American exports and more lost jobs and that, in turn, means pressure on sellers to lower prices to avoid being stuck with unsold goods and services. It’s a vicious cycle we want to avoid.
...commodity prices around the world have fallen, an indication of an economic slowdown or even the start of a contraction...Oil may fall to under $20 a barrel from its July 2008 high of $146, ...At $20, it would be a short-term disaster for oil-field towns, where the falling price has already resulted in fewer drilling rigs, shutting some operating wells and fewer support jobs. The falls in prices around the world raise the specter of deflation.Wait a minute, aren't things getting cheaper a *good* thing? Well, theoretically, yes, but not in an infinite-growth economy where new money must be created to pay off interest on loans. Remember, deflation means paring off future loans with increasingly valuable dollars.
That price drop points to the problem with a general deflation, in which the overall prices of goods and services fall. People tend to delay purchases if they believe they can get a bargain in the future...The problem is that without constant spending, the economy collapses. Money circulates just like the blood in your body — when the heart stops so does everything else. Economists generally argue that a broad deflation is a prospect far worse than inflation and much harder to solve. However one research paper argued that the deflation of the late 1800s — an era, like ours, of rapid technological change — did more long term good than damage, though for many the short-term economic pain was intense.
Americans since World War II have become accustomed to thinking that delaying purchases means paying more, because of inflation. But with deflation the opposite takes place: Because things will cost less tomorrow, next week or next month, people want to hold cash and postpone purchases. ..Without the incentive of rising prices brought by inflation, we risk falling into a vicious cycle of economic decline by deferring the purchases that drive the economy and the investments in education, infrastructure and basic research and undergird it.The problem is, if people are earning ever less money, they, of course, cannot buy more, nor can they pay more for stuff. In the past, as things cost more, people's wages went up to compensate. That was the wage-price spiral of the seventies that high interest rates supposedly dealt with. But the subsequent years were based around "disciplining" labor. Capital's share of the economy increased dramatically as labor's share fell. Plus, Neoliberalism's idea of individual rational actors making self-interested decisions in impersonal markets leading to efficient outcomes caused collective investments in education, health, housing and retirement to be dismantled, and the costs of all of that placed squarely on the backs of individuals (401K's, IRA's, health care savings accounts, 529 plans, student loan debt, health care debt, etc.). Extreme inequality also caused "expenditure cascades" for things like housing, as people try to keep up with people earning far more than them, and sellers price their wares (such as apartments) to target a small share of ultra-high wealth individuals rather than an affordable price. As Johnston points out:
The underlying global problem is that while profits have soared and corporations hold vast hoards of cash, few workers worldwide are getting real pay raises and many have seen their incomes fall in real terms. Their lack of purchasing power has lowered aggregate demand. My analysis of new IRS data shows that, adjusted for inflation, the bottom half of Americans reported average total incomes (excluding welfare benefits like food stamps) of just $14,775 in 2012, down 18 percent from 2003. Most people’s income derives from work. When pay is stagnant the capacity of people to buy more goods and services also must be flat unless they go into debt. One way we have seen this in the U.S. is that the average age of cars on the road has increased from 8.4 years in 1995 to 11.4 years in 2014. We are slowly becoming less well off.So, how can we have inflation when people are getting poorer? Don't ask me.