Insights
Crinoline and croquet are relics of the past, and while no one is making dramatic political
gestures by throwing themselves in front of royal horses on Derby Day, historians still recognize
echoes of a familiar pattern. Once again, we’re living in an age of dizzying technological change,
where the global superpower’s influence is being challenged, and economic prosperity conceals
deep vulnerabilities. Perhaps most strikingly, today’s leaders maintain a confidence that
everything is unfolding as it should, just as it did during the Edwardian era—a summer before the
storm in this new age of globalization.
Take a step back and survey the current landscape. Oil prices have skyrocketed, now over $65 a
barrel—more than twice what they were a year and a half ago. Conventional wisdom reassures us
that this spike is temporary, thanks to market forces that will soon spur investment in production
and refining, naturally correcting the imbalance between supply and demand. And when that
happens, we’re told, oil prices will return to a manageable $25 per barrel. As if by magic.
Then there’s the fallout from France’s rejection of the European Constitution. The French were
branded as reactionary for opposing the very reforms meant to make the country more
competitive and dynamic. Those same reforms, after all, are what allow companies like Gate
Gourmet to summarily fire hundreds of workers at Heathrow—a scenario reminiscent of 19thcentury mill owners. But from another angle, perhaps the French “no” reflects a deeper
discomfort with reforms that translate “flexibility” into mass layoffs.
Now, shift focus to the United States. Like Britain before it, America’s long-held global
supremacy is slowly eroding. China is not yet on par with U.S. wealth, but its breakneck growth is
altering the geopolitical landscape. The signs are already there—Washington and Beijing are
scrambling for influence in Africa, especially when it comes to oil. At the same time, the U.S.
economy, though outwardly strong, has its own structural issues. With imports vastly exceeding
exports, the country is living beyond its means. Yet, in this climate of complacency, a massive
current account deficit—6% of GDP—is spun as evidence of America’s economic muscle, not its
vulnerability.
In this new Edwardian moment, many take comfort in the fact that today’s higher oil prices
haven’t triggered the runaway inflation of the 1970s. Back then, a fourfold increase in oil prices
crashed a quarter-century-long postwar boom, sending inflation soaring to 27%. Today, inflation
is a relatively modest 2.3%, and rising energy costs seem manageable. But dismissing the impact
of high oil prices is a mistake. When fuel costs more, people cut back elsewhere—yet, ironically,
they’re reluctant to actually spend less.
In the 1970s, strong unions could negotiate pay raises to offset inflation, compounding the
problem. Now, that bargaining power is largely gone, but the financial system has responded by
making it easier for households to take on more debt, rather than reducing consumption. The
real effects of high oil prices are instead seen in rising household debt, inflated asset values, and
growing trade imbalances.
Some argue that capitalism’s resilience over the past 250 years, through stock market crashes,
terrorist attacks, and oil price shocks, should allay any worries. And yes, the system has
absorbed shock after shock. But there are three key reasons for caution. First, history has a habit
of repeating itself. The first wave of globalization, like our own, saw unchecked capital flows and
open borders for labor. Eventually, the backlash came, with protectionism and growing labor
unrest.
Second, global stability is at its most precarious during times of shifting power dynamics. By the
late 19th century, Britain was feeling pressure from the rising powers of the U.S., Germany, and
Japan, just as the old empires of the Ottomans and Hapsburgs were fading. As we look forward
from 2005, China and India—home to nearly half the global population—are poised to reshape
the world order in the coming decades.
Lastly, rising oil prices tell a larger story. As China and India drive up global demand for energy,
experts warn that oil production may soon reach its peak. If supply constraints begin to bite, any
price drops we experience will be short-lived, with the broader trend pointing towards higher
costs over time.
