Road Signs in the Ukraine Whirlwind
The military and economic warfare set in motion by Russia’s invasion of Ukraine is in the process of dealing a fatal blow to full-fledged globalization.
Neoliberalism died a few years back. Nobody bothered to hold a funeral, but everyone in and around Wall Street who talks about “environmental, social, and governance” (ESG) investment criteria is testifying to the death of that shareholder-only economic perspective, even if the implications haven’t sunk in widely.
The Big, Big Questions we should now be asking are whether capitalism as we’ve known it in the two centuries since the Industrial Revolution can survive the loss of those two of its foundational pillars: unhindered free markets and a global playing field. And if not, what might and should come next?
It’s hard to see clearly when you’re in a whirlwind, though, much less think constructively. So studied attempts at answering those Big, Big Questions about the future have to wait. A more realistic goal is to add a bit to our understanding of the present. Here are a few road signs that might help us at least understand where we are on our unexpectedly rapid journey to an unknown future:
1. The disruption to trade patterns — for oil, natural gas, wheat and other food staples, and several important metals — is severe. It will turn into debilitating shortages if Russian oil and gas sales are slashed, as many in the US Congress and elsewhere are advocating. The disruption Covid brought to supply chains for manufactured goods into and out of China and other parts of Asia has not ended. Put those two shocks together, and the lives of ordinary people in the West will soon be upended. Gasoline at $4 per gallon isn’t the worst we’ll see. Oil executives are talking of $200 per barrel crude oil, suggesting $8-$10/gal at the pump, plus equally expensive heat and cooling.
2. Europe first, and also the US, are on a path to a combination of big-time recession and inflation. In theory, they could still get off that path, but it’s hard to see how at this stage. Famed Iranian-American economics commentator and IMF and World Bank alumni Nouriel Roubini doubled down on the risk in a Project Syndicate piece this weekend: “Today’s crisis represents a geopolitical quantum leap. Its long-term implications and significance can hardly be overstated. In terms of the economy, a global stagflationary recession is now highly likely.” The problem with having recession (stagnation) and inflation at the same time is that governments can’t treat either without making the other worse.
3. Recessions bring declines in oil demand, and this one could be terminal. Oil consumption is not yet fully back to the 2019 levels from which it plummeted during the 2020 Covid closures. Electric vehicle sales held up remarkably well in 2020, and the US this year is poised to join China and Europe in a leap into double-digit marketshares. The combined result may well be a realization that 2019 was the forever peak in oil consumption. It’s all downhill from here, and once momentum picks up, the fall may be fast — especially after a bout of unprecedentedly high prices.
4. Nuclear power has been foreclosed as a major component of post-fossil fuel energy supply by Russia’s attack on the site of the Ukrainian reactor that also happens to be Europe’s largest single nuclear station. To be fair, prospects for nuclear weren’t great anyhow, given the staggeringly high cost of new reactors and the relatively steep cost of operating existing nuclear plants. There will continue to be talk of small, less accident-exposed reactors, but these won’t be ready for widespread use for several years, and could at most provide a smallish additional option for backup power when solar, wind and battery-stored electricity is in short supply.
5. China will benefit enormously from its continued access to Russian oil and gas and to that country’s mineral and food resources — all of which will sell at a discount that will grow in proportion to the success of Western efforts to ban their sale outside China. These advantages will be offset to a degree by reductions in Chinese exports to Europe and the US as recession deepens. But on balance, China will probably come out ahead, at least in relative terms.
6. All this will push the energy transition ahead more rapidly. Fossil fuel prices going through the roof; Europe’s suddenly intense desire to break its reliance on Russian oil and gas; further gains in the international rankings for the world’s top producer and market for renewable generation equipment, China. All augur well for rapid abandonment of fossil fuels.
The celebratory tone being adopted by some proponents of America’s traditional interventionist, neoconservative foreign policy and the notion that climate activists are pushing for too rapid a transition off fossil fuels will both prove short-lived. The world isn’t going to rush back to oil and gas because they cost so much — or try to take back Syria and Afghanistan to compensate for Ukraine.
No one knows what’s coming in the near future, but it won’t be Back to the Past.
