Paul  00:06

Hello and welcome to Macro Bytes economics and politics podcast from abrdn, hosted by me, Paul Diggle and my colleague Luke Bartholomew, we're both economists in the Research Institute here at abrdn. And today we have a very special guest on the podcast. Helen Thompson is a professor of political economy at the University of Cambridge. She's a columnist for the New Statesman. She was the co-host of the absolute must listen podcast Talking Politics, which was one of mine and Luke's all time favourites and earlier this year, she published a new book called 'Disorder: Hard times in the 21st century'. And the book is about digging beyond surface explanations of recent political upheaval, things like Trump and Brexit and the perma-crisis of the past 15 years, which are the rise of populism, the wake of the financial crisis, of fraying global order, and instead gets to deeper structural explanations of our current political and economic juncture. Things like the geopolitics of energy markets, and how monetary policy and the design of the financial system has shaped our political world. And these themes have, of course, come into sharp relief with the Russian invasion of Ukraine, and concurrently sharp global interest rate hikes. So we're absolutely delighted to have Helen on the show. So this is going to be part one of a two-part discussion with Helen, the first focusing on energy, and the second on monetary policy. Professor Helen Thompson, welcome to the podcast. 

01:38

It's a pleasure to be here, Paul.

Paul  01:40

So I want to start by asking you to outline your reframing of 20/21 century geopolitics around energy markets, and in particular how Europe's external energy dependency has created quite a unique set of political challenges for the continent.

Helen  02:01

Yeah, I think in order to understand that, we need to go back to the beginning of the 20th century. The ways in which Europe was left or the most significant European powers were left when oil started to become a significant energy source for military reasons rather than for economic reasons. And this put the European powers at a very considerable disadvantage, because only Austria had any and it was landlocked. If you're Britain, and you're beginning to see that an age of coal was coming to an end, not because coal was not going to be important as an energy source, but because oil was going to be the energy source that was decisive militarily - that was a big problem. And it meant that you were going to live in the shadow of the energy power of both the United States and Russia. And I don't think it's a coincidence that geopolitically that the 20th century ended up being dominated by those two states, obviously, in the case of Russia becoming the Soviet Union. And that meant that European countries from that point on had a foreign energy dependency problem. In the first part of the 20th century, they dealt with it in some fairly awful ways, including Britain's empire in the Middle East. And in terms of Germany's position, the attempted conquest essentially of Russia, in order to improve that. And then in the second half of the 20th century, after the the Second World War, the problem had to be faced again. And actually, from the point of view of western European countries, and ultimately, from the point of view of Washington, there wasn't actually any escape from Britain carrying on as an imperial power in the Middle East, because Washington didn't want western European countries importing oil from the Soviet Union, nor did it want it importing oil from the western hemisphere, because Washington was sufficiently worried by that point about long-term supplies for itself. So that left western European countries dependent on Middle Eastern oil, Britain acting as the energy guarantor of that by virtue of its imperial power in the Middle East, and the basic rules of that rather short-lived order came crashing down in the Suez Crisis in 1956. Because when the crisis came, President Eisenhower wasn't actually willing to allow Britain to act as an imperial power, even though the whole setup of dealing postwar with western Europe's energy needs was premised upon that. So from that point on, we see, the western European countries continue with a Middle Eastern energy dependency, but they add to it through time, what starts off as a Soviet energy dependency and becomes a Russian energy dependency. Obviously, there's some variations around this, including the different attitude that different western European countries take to nuclear power, ultimately. But if you think about it as there being like three principal, oil and gas centres in the world, the Middle East, Russia/Soviet Union, North America, then the two the European countries made themselves most dependent upon were the Middle East and Russia. And what we've seen, obviously, in this crisis, so in the Ukraine crisis' is the huge amounts of moral and political pressure that's been put on the dependency upon Russia. At the same time, I think we can also see how difficult it is for European countries to break that dependency.

Paul  06:02

So Germany, in particular, has become the focus point of this external energy dependency, and particularly, the dependence on Russia. Why was it that Germany went down this Russian route, as opposed to say, a domestic energy generation through nuclear or an external dependence on the US instead?

Helen  06:23

Well, I think there's several things that need unpacking here, Paul, the first is, I think, to see that if we look at the long course of history, so going back to the beginning of the 20th century, where oil is concerned, that actually the period in which Germany isn't dependent on peaceful trade with Russia / Soviet Union, for oil and gas are significantly fewer than the ones in which that Germany is. I think it's better to see the aberrations, which actually is the Nazi period, and the first decade after the Second World War, prior to the Suez Crisis is interludes of very different kinds, radically different kinds. Obviously, if you think about it as Germany being resource poor, it wasn't resource poor where coal's concerned, but it's resource poor, where oil and gas are concerned, and it's sitting with a large eastern neighbour that's resource rich, there's a certain logic to thinking that Germany should sell goods into Russian markets and Russia should export resources to Germany. And I think some of the criticisms that are made about Germany's position, whilst I would make some of them myself, you do have to take  into account the pretty difficult position, predicament, that that Germany has been in, in this respect. I think where the nuclear question is concerned, initially, Germany was very keen on nuclear power, or West Germany I should say, was very keen on nuclear power. At that time when people had ideas that nuclear power wouldn't just be a source of electricity, but that actually could be used in other ways to reduce the amount of oil used in the transportation sector, which wasn't necessarily just about electrifying the transportation sector, because as things stand, obviously, nuclear and oil are not directly interchangeable with each other predominantly nuclear power has been used to generate electricity. I think that what then happened in West Germany in the 1970s, was that there was a big, not only environmental backlash against nuclear power, but also a democratic backlash against nuclear power. Because of the German dominant elite, if we can call it that, had to be so obsessed with energy security, because Germany, West Germany, was in such a weak position, the approach to nuclear power was very technocratic. It was let's deal with this as a technical issue, keep it away, as a technical issue, keep it away from democratic politics. And that proved unsustainable in West Germany. So it is out of the protests, really large scale protests against nuclear power, that West Germany ends up with a Green Party, a much more significant Green Party than any other large European country. And then at some crucial junctures, not least between 1998 and 2005, that Green Party has ended up in government and pushed the anti-nuclear power agenda and I would say, right now acts as a constraint on Germany doing a u-turn on nuclear power. I think if you look at it in terms of the energy relationship with Russia, what is true is that the German business and the German government, in some sense, double down on it in the 1990s, not least because it gave the end of the cold war and the end of the Soviet energy ministry controlling those resources in the former Soviet Union allowed the possibility of western companies to invest in Russia. And where Germany's companies were concerned - Germany doesn't have a major oil company - it was gas companies, and they established production partnerships in Russia for the first time. And that was advantageous. And I would say at that point, so until the 2010s really, perhaps a little bit earlier, perhaps at the point of the Ukrainian Orange Revolution, they weren't really doing anything that other European countries weren't doing, including, you might say that the US showed interest in the 2000s in engaging in an energy partnership with Russia, in certain areas. The thing that makes a real difference, and that is why it's such a big part of my geopolitical story about the 2010s is the American shale gas boom, because that means that there is an alternative for those European countries that really want an alternative to German, sorry to Russian energy imports, that means Poland and the Baltic States and Germany rather makes a statement in not going down that road, I mean, to the point of not even being willing to build any liquid natural gas ports. And I think that that then becomes a fault line running right the way through European Union and NATO through the 2010s at the point when actually, Germany has options. And that option critically involves the United States. It doesn't move from the position that it had taken up going back to the aftermath of the Suez Crisis.

Luke 12:09

And I think part of the reason the German government might give for not taking up that position is perhaps this idea that mutual dependence can actually be stabilising right? That it's not just that Germany is dependent on Russian gas its that Russia is dependent on selling its energy to Germany and Europe, in general. So I guess the question is, one why did that logic of mutual dependence or stabilising not play out? Why did Putin read that as weakness? And are we now in a position to say he was wrong to read that as weakness given Europe's response? Or, you know, are we too early in this story, and let's see how Europe goes if Putin decides to turn off the gas this winter to draw that conclusion?

Helen  12:54

The thing that changed quite early on after Putin came into power, and I think he understood the significance of this pretty well, because I think the evidence that he always thought systematically about energy and strategy is quite decisive. The thing that changed was China's growing oil consumption in particular, but then in the 2000s, and then in the 2010s rapidly growing gas consumption. And obviously it isn't just actually China, it's India, too. So from a point, if you want to put a date on it, I would say it was the summer of 2000 or the late spring of 2003, when the Putin agrees with the Chinese government, they're going to build an oil pipeline is that Russia or Putin was building up Asian options, Asian markets for Russia. Not to the point, I think, early on, where they could have at all compensated for a serious loss in the European markets. But we have seen during the course of this war, that it is possible for China and India, in particular, to absorb quite a lot of the demand that would otherwise be lost. I mean, I think it's also important to see that actually European countries haven't actually really reduced that much voluntarily the oil and gas that they're buying from Russia. So if you look at what's happening with oil, one way of describing it is just that the supply chain's patterns are being reconfigured. So, Russia, for instance, sells more crude oil to India. European countries buy less crude oil from Russia. But Indian refineries actually, and then they also buy less petroleum products from Russia, but Indian refineries turn that Russian oil into petroleum products and it gets sold back into European markets. But I think that you might argue that Putin took more of a risk than he perhaps thought that he was in the way in which European governments would respond. But they haven't responded in ways that make it impossible for Putin to continue with this war. I would say quite, quite the contrary to that. I think the other thing that was always in Putin's favourite where gas was concerned, and this does focus on Germany, is that pipeline gas from Russia is a lot cheaper for Germany, than seaborne gas. That would have been true even without the intensified competition from Asia for liquefied natural gas that we could see in action before the war even started so in the second half of last year. Given the importance of gas to the German industry, having to absorb significantly higher gas costs, because you're bringing it by sea, rather than it coming through the pipelines from Russia is a significant economic blow to Germany. And I think, if you look at the data that was out this morning, on the German trade deficit, we can see that the consequences of much higher energy prices for the German economy. 

Paul  16:43

I want to ask you Helen and about how renewables and the energy transition plays into this geopolitical dynamic because one can imagine a world in which a fully transitioned European energy system was able to sever this interdependence with Russia and that world say would have allowed for much stronger sanctions and not having the energy carve out. But equally in the book, you raise the prospect of great power competition centred around the energy transition, in particular, the supply of the metals necessary in battery technology. So is the energy transition, should we understand it as geopolitically stabilising because it ends this external European dependence, or destabilising because it is the next thing that great power competition centres around?

Helen  17:35

I think there's two different things here. Paul, I think that, as you say, metal extraction, and the supply chains around metal extraction, are going to produce geopolitical, or are already producing geopolitical fault lines. So the idea that, I think is there in quite a bit of the rhetoric about the European green deal that this is somehow the energy transition somehow transcends geopolitics, and allows us to leave all that stuff behind us. I just think that that that's wrong. I think what we don't know yet, is whether the geopolitics of metal extraction is really going to be like the geopolitics of finding oil and gas. As we know China, where rare earth minerals are concerned, completely dominates at the moment. The Americans are dependent upon China for rare earth minerals. And the Chinese have shown that they are willing to use other countries' dependency for strategic purposes as they did in banning the export of those minerals to Japan back in 2010. But whilst it would seem quite probable that China has some advantages, just arbitrarily as a result of the kind of minerals that are under the surface of the Earth in China, it's also true that China's present advantages come about because China has been engaged in this metal mining and rare earth mineral mining for much longer and much more systematically. As a strategic imperative it actually goes back to the Mao, beginning of the Mao era in China, and other countries, including the United States and European countries have been much less willing to go down that road. And it may be that when, particularly I would say the United States gets very serious about metal extraction, China's advantages might not be all that they are right now. So it is possible that it's not such a fierce I think geopolitical contest as oil and gas turned out to be.

Paul  20:03

One of the misnomers about rare earths is the word rare. They're actually not that rare.

Helen  20:09

Having said that, I would say that the what will be difficult is the fact that, very difficult geopolitically, is the fact that the old geopolitics of fossil fuel energy won't go away, whilst the new geopolitics of the energy transition is developing. Because I think the energy transition will be slow, then we will be living in a multi energy source world. And because we're living in a multi energy source world, we'll be living in a multi geopolitical, fault line from energy world, as well. So we're going to live with the old geopolitics and the new geopolitics and they're going to interact with each other. So if you look at China's position, it's very clear that the Chinese leadership don't think, Okay, we've got lots of advantages, where renewable energy is concerned and electric vehicles and renewable manufacturing therefore we don't have to worry about energy, quite the contrary. I mean, they, the Chinese leadership has a very, very acute sense of China's energy vulnerability, ongoing energy, vulnerability, and they don't think it's one thing or the other. They don't think in binary terms about the energy problem.

Luke 21:30

So one of the features of the 1970s energy price shock, it seems to me was that there was this mobilisation of a politics and a rhetoric around sacrifice. Carter, think you talk about this in your book, particularly used to tap into the kind of politics of sacrifice around that the need to consume less energy and the living standard consequences that would come with that. And that's just a necessary part of national security considerations, or just the hand that nature has dealt us in that sense. And it seems to me that that rhetoric, that politics, is lacking this time around. If anything, it's a politics of subsidising demand rather than calling on sacrifice. So I'm wondering a if you sort of share that analysis of mine - the difference between these two episodes. And second, to the extent to which you do whether that might have something to do with perhaps there is a finite pool of the politics of sacrifice that one can draw on and that's sort of been exhausted through the pandemic, where that was a big part of the politics of that pandemic, this need to collectively sacrifice. And if that is the case, and there is this sort of finite source that can be drawn on, what might that tell us about the politics of energy transition, and climate change where presumably, again, that kind of rhetoric, that kind of politics, is going to need to be drawn upon?

Helen  22:51

Yeah, I think that it, it's quite striking, if you compare the 70s, the latter part of the 70s and what Jimmy Carter politically tried to do with what happened last autumn, so before the war, were before Omicron hit, there was I think, a growing public sense that energy was a problem. Prices, particularly gas prices in Europe and Asia, were ordinarily high, and there was very little talk about dealing with the price side of the problem, or the climate change side of the problem by talking about reduced energy consumption. I remember that I wrote a piece in which I said that the only possible way in which the 2030 interim targets on net zero could be met was by reduced energy consumption. And I got very little reaction to it. It  wasn't the thing I think that you were supposed to say, in some sense. I think the war though, has changed things in this respect, because, and it is interesting, when you then think about the reasons why Carter wasn't able to do this, is that you do have a language of sacrifice, about energy consumption, being deployed in a number of European countries, and in a sort of way, though not the same way in the United States. It's more about tolerating high prices in the United States is the sacrifice has to be made rather than actually reducing consumption. And I don't think it's actually surprising if we look historically why this should be the case in the sense that it's easier to frame sacrifices around war than it is to frame them around energy crises. The pandemic is an interesting one, because it's not something people of our generation have had any experience of before and clearly, as you say Luke, the language of sacrifice was  deployed then. So I think that we are going to see more of it, in the sense of it's going to be pretty difficult, I think for European countries to get through the next six months, without quite a number of appeals to people to use less energy and perhaps when it really comes to it some kind of rationing system if the war continues in its present form. Anyway. But whether that will be translatable into the broader energy questions and the climate questions, if and when the war comes to an end, I'm still a bit sceptical about that. I mean, I've got an open mind because I do think that once energy gets into consciousness, that actually the language can change quite quickly. The other thing that I would throw in is, is that I think that the memory of what happened to Carter actually runs quite deep, even in the consciousness of politicians now who are several generations on and that I think the lesson that western politicians took out of the Carter experience was never go there again. And they've had to go there again, or they're starting to have to go there again, for these reasons, pandemic, war. But I still think that they pretty, I guess, I'm  talking to them, I don't know this, but they're pretty dubious, I would suspect about the idea that you can repackage it into this is necessary for climate or this is necessary because we're running into resource limits.

Paul  27:15

And even recent precedent like the gilet jaune say aren't particularly promising in that regard of course. Professor Helen Thompson that was fascinating discussion. Thank you so much for joining us on Macro Bytes. Next week, in part two of the podcast we're going to discuss all things monetary policy with Professor Thompson. And if you are enjoying macro bites from abrdn, please give the podcast a like or subscribe on your podcast platform. But otherwise, goodbye and good luck out there.

27:52

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