The English Marxist historian Eric Hobsbawm is revered by generations of students for his masterful trilogy on England’s economic and social history in the “long nineteenth century”. The books describe how capitalism first became firmly entrenched in Europe and was then exported to the rest of the world. They go by the titles The Age of Revolution (which covers the period 1789-1848), The Age of Capital (1848-1875) and The Age of Empire (1875-1914).
I would suggest that our present era be designated the “age of imbalances”. These imbalances developed at different rates and over various time horizons, but their extent and their interconnections were thrown into sharp relief by the financial crisis of 2008, whose reverberations continue till today. These imbalances are by now too well known to bear a complete recounting here. However, in the international sphere, these include country financial imbalances (gross and net) and their counterparts in current account surpluses and deficits, while in the domestic sphere these include fiscal imbalances, excessive indebtedness, underemployed human resources, and increased income inequality.
I should perhaps confess that I was slow to be converted to the “imbalance” school, considering many of these developments to be the legitimate consequences of enhanced specialisation resulting from intensified globalisation. I now believe that in a world where politics is predominantly national, and without an unchallenged global power like Victorian Britain or imperial Rome, national borders will continue to matter. This is a lesson that the euro zone continues to make abundantly clear, including in the elections of last weekend.
For once it is the rich countries that are struggling to fashion a political and policy response. At the same time, the poorer countries fear the emergence of new global rules that might make their own economic development more difficult than before. The persistence and depth of the crisis and the resultant domestic political divisions in several major countries have also meant that the G20 leaders’ process has been less effective than was hoped, although the world is surely better off having this forum than just the G7.
A critical dimension of the “dynamic rebalancing” facing the world will be in the sphere of energy. As regular readers know, I recently took over as chief economist of Shell International. Shell has a 40-year -old tradition of using “scenarios” to think through alternative paths for the world economy and their implications for the energy system. These scenarios (available at shell.com/scenarios) are typically updated every three or four years. The last published update (labelled “Signals and Signposts”) was in early 2011, and attempted to assimilate both the global financial crisis of 2008 and the outcome of the United Nations climate change conference in Copenhagen in 2009. These scenarios were based on work done in 2008, at the crest of the global boom, and when the long-term prospects for the Chinese and Indian economies had come into focus. Both sets of scenarios have been extensively presented in India; as such they are familiar to Indian energy specialists.
The underlying challenge facing both national energy policy and the global energy system is to design pathways that reconcile economic growth, security of energy supply and resource sustainability. The last is epitomised by, but not restricted to, the green-house gas challenge. Freshwater availability also represents an increasingly important constraint on both energy and food production. Assuming that the present crisis will not seriously impede the long-term growth prospects of the poorer countries, these scenarios project a business-as-usual gap between prospective global energy supply (from all sources) and energy demand of 20 per cent, by 2050, even taking normal innovation and price responses into account.
Given the slow rate at which new energy sources can reasonably find their way into the global energy mix (given the scale of the global energy system, and the vast capital requirements involved), a sobering finding of the scenarios is that even under optimistic assumptions on global co-ordination and country-level policy action (a scenario that is dubbed “Blueprints”), the goal of limiting atmospheric carbon-dioxide (CO2) concentrations to 450 parts per million, currently considered the safe threshold to achieve the globally agreed limit of 2 °C, is likely to be overshot. The current global environment, of a patchwork of inconsistent regulatory regimes and increasing resource nationalism (referred to as “Scramble”), promises an even higher peak level of CO2 concentration.
It is against this background that one needs to assess more recent developments in global energy supply that have been widely reported in the international press. The most important of these have been the technological, entrepreneurial and distributional developments that have unlocked gas and associated liquids locked in shale formations (“unconventional” gas and “tight” oil as they are often referred to in the press) particularly in the United States. Together with the setback to nuclear energy represented by the Fukushima disaster in Japan, these have now reached a scale that is reshaping the global market for hydrocarbons.
In this emerging landscape, market and regulatory developments in the US are crucial. Given the much lower degree of transportability of natural gas compared to oil, as well as the additional demand arising from Japan, already the world’s largest importer of liquefied natural gas, huge disparities currently exist in natural gas prices between the continental US (where oil parity pricing has broken down) and other markets, notably Asia, where oil parity pricing for long-term contracts remains the norm. A critical issue for the medium term is whether the US will permit large-scale exports of gas, thereby equalising global prices in the medium run, or whether, as some are arguing, cheap energy should form the basis for a revitalised American manufacturing sector. It is in this regard that energy rebalancing and trade rebalancing could end up being linked.
In sum, the unconventional gas revolution provides some comfort that there can and will be a market supply response to the structural energy shortage predicted globally for the medium term. But it cannot be a complete answer, nor does it help materially to address the issues of planetary stress referred to earlier. Domestic policies, including energy efficiency, transportation and urban design, will remain critical, nowhere more so than in India.
The writer is chief economist at the Shell Group.
These views are personal