Part II. The Future of Energy: Why the price of oil and gas should increase (but will it?)

oil drilling http rccblogThe future of energy will be driven by a combination of price and availability, as it always has. But in today’s uncertain world one thing is very sure, and that is that this combination is already in rapid transformation, meaning that we are now looking at a very different future indeed. In this four part series, we are looking out into the near term future of a battle which  is already well underway, the unfolding market contest between non-renewables and renewables.  The rising price of oil, in particular (because of its unique role as a fuel for mobile applications) together with declining prices of “renewables”  is creating new opportunities for long-term investors, as well as requiring that government policy take into consideration the considerable implications of this transformative  shift.  In Part II, we are looking first at the unfolding and very different picture emerging for oil and gas.

Why the price of oil and gas should increase

– Robert U. Ayres. Paris, 29 October 2014

Photosynthesis was (and is) the biological process that removed carbon dioxide from the primitive atmosphere and left some of the oxygen in the atmosphere and sequestered CO2 in the earth’s crust. That happened as living organisms, such as diatoms, in the oceans attached carbon dioxide to calcium ions to make shells for themselves and left them as chalk or limestone. This went on for billions of years. When the oxygen level in the atmosphere rose enough, the new ozone layer cut the UV radiation level and made life on land feasible. Plants moved onto the land, and thrived spectacularly during the so-called Carboniferous era, several hundred million years ago when the CO2 level was still quite high by present standards. For over a hundred million years immense accumulations of dead plant biomass were covered by silt from erosion of the land surface. Meanwhile the bodies of dead marine organisms accumulated in some places under the sea. These accumulations were gradually compressed and “cooked” (pyrolized) releasing some of the hydrogen and converting the rest of the mass successively into peat, lignite and coal or (in the case of marine biomass) into bitumen and petroleum.

These accumulations constitute an energy (exergy) resource that currently drives industry and human civilization. We humans are now “un-sequestering” those stored hydrocarbons, combining them with oxygen and putting CO2 back into the atmosphere. Moreover, we are doing this at a rate thousands or even millions of times faster than the original accumulation. This ultra-rapid dissipation of stored exergy in the form of hydrocarbons clearly cannot continue indefinitely, not because we will run out of carbon fuels immediately, but because the atmospheric buildup of CO2 cannot continue much longer without catastrophic climatic consequences (IPCC 2007, 2014).

Indeed, consequences of climate change are already showing up in many parts of the world. Droughts are causing major problems, resulting in abandoned farms and overcrowded cities, not only in inflammable southern California. In southeastern Brazil the reservoir providing drinking water for 9 million people in Sao Paulo is now down to 5 percent of previous normal. in Central Asia Lake Aral is now virtually a memory. In Africa the Sahel and the headwaters of the Nile are drying up, as is the hinterland of Iraq and Syria, once watered by the Tigris and Euphrates rivers {Klare, 2001 #2911}.  These changes are forcing millions of rural farmers and herdsmen into already overcrowded cities where there are no jobs for them and where their children become ready recruits to religious extremism, Islamic or otherwise.

However, reverting to the problem addressed in this essay, the end of that era of rapid utilization of fossil fuels is already in sight. The fact that discoveries have lagged behind consumption has been known for a long time (Figures 1 and 2). Some years ago the oil geologist M. King Hubbert, taking into account discovery rates and depletion rates of known fields, predicted that global oil output would peak between 2000 and 2010 {Hubbert, 1973 #2524}{Hubbert, 1980 #6246}. Others, notably Colin Campbell and Jean Laherrere came to the same conclusion {Campbell, 1998 #1087}. Figure 3 traces the actual history of production from 2002 through 2005. Saturation seems evident.

ayres future oil prices fig. 1

ayres future oil prices fig. 2


ayres future oil prices fig. 3

From the perspective of nine years later (2014) it can be seen that global oil production did not actually peak in the period 2005-2013. The Post-Carbon Institute has compiled the data (from the IEA) from 2001 through 2013, in Figure 4 below. It shows clearly that production from standard “legacy” sources, such as the OPEC countries, Africa and Russia did not increase. The small increase since 2005 has been entirely due to US shale oil production and Canadian tar sands production, known as “unconventional” oil. Note that the black curve is the international oil price during that period. Evidently a small change in output after 2008 was followed by a very large change in price. But when the economic downturn “bottomed” in 2009, the price went up again and stayed fairly high after that, albeit there has been some decline from highs near $120/bbl in 2011 to the current level which is around $90/bbl. or less. Does this decline reflect recent economic malaise or increased supply? Other questions arise: Is the apparent peaking of the traditional “legacy” sources due to geological scarcity? The decline of North Sea production would seem to be an obvious example. Or is it due to possibly “temporary” problems such as the instability of Iraq, civil war in the Sudan, the end of the Khadafi regime in Libya, troubles in Nigeria, and other geo-political problems? Or are these problems likely to become permanent? The short answer is unquestionably: some of both.

Figure 4

ayres future oil prices fig. 4

 The “fracking” boom

Here a digression is necessary. The history of natural gas (NG) prices in the US is interesting. From 1973, during the oil embargo, to 1984 the price of NG rose 12-fold, while US output declined by 15%. From 2001 through 2007 the price of NG rose 50%. During those years fracking was very profitable. Then prices dropped dramatically in 2008, and have remained below the cost of drilling and operating new wells. Since then, demand from the electric power industry, has helped prices recover somewhat, but they are still below breakeven, despite near zero interest rates. But the low prices have given an economic boost to the US economy, badly needed in the post-2008 era.

Are the early profits of shale gas producers sustainable? Why have so many projects been abandoned? What are the dangers from earth tremors? What is the risk of methane leakage? What are the risks of groundwater contamination from drilling? What are the true breakeven costs, allowing for dismantling and disposal of drilling equipment from exhausted wells? If shale fracking is to be encouraged in countries and areas that are not unpopulated (like North Dakota) what of the human costs of displacement and water diversion? In particular, to what extent are the water requirements for fracking inconsistent with water needs for other purposes? Probably the real answers are not known to anyone, not even in the executive suites of Exxon, BP, Shell, Chevron, Total, Gazprom, Aramco and other major “players”.

Yet, the profitability of fracking for gas is in question partly because several of the early leaders are losing money. Four of the main shale producers (Chesapeake, Devon, Southwestern and EOG) lost a cumulative total of $42 million during the 5-year period from 2008-through 2012.  Many firms have had to write-down their claimed gas reserves. Contrarian energy analyst Bill Powers, author of “Cold, Hungry and in the dark: Popping the shale gas bubble” has noted that many shale companies booked reserves based on claimed well lifetimes or up to 40-65 years {Powers, 2013 #7735}. Yet most shale wells see rapid declines. Bakken shale oil wells, starting at 500 bbl/day were down to 150 bbl/day at the end of 12 months, 90 bbl/day after 24 months 50 bbl/day after 48 months and continuing to nearly zero after 5 years {Hughes, 2010 #7448}. Very few wells in a typical field are highly productive. For instance, about 30% ofless than 250 bbl/day at a given time, while 30% produced more than 500 bbl/day and perhaps 3 % produced more than 1000 bbl/day (Hughes op cit).  This rapid depletion means that just to maintain current output requires far more drilling than conventional oil or gas fields.

What of the future?  One negative indication is that very low interest rates for financing drilling is a temporary phenomenon due to the actions of the Federal Reserve. As the US economy recovers from the debacle of 2008, interest rates will rise, and debt-financed drilling for shale gas (or oil) is going to get even more expensive than it is. A second negative indication is that oil shale has a very low energy return on energy investment (EROI). In a study commissioned by the Western Resource Advocates (an NGO) Prof. Cutler Cleveland of Boston University found that EROI for shale oil at the well-head is about 1.7, and after refining, the EROI for shale oil falls to 1.5, making it, at best, a marginal resource (about the same as ethanol).  Another negative indication is that the USGS has cut the original estimates of 800 trillion cubic feet (tcf) (supposedly a 40 year supply for the US) to 400-500 tcf.  Several early shale plays are already peaking. This applies to Barnett, Fayettesville, Haynesville, and Arkoma Woodford. Only Marcellus is still growing. Powers predicts that total recovery will be 125-150 tcf, an 8 year supply (op cit).  He calls the shale gas phenomenon a “bubble” and I am inclined to agree.


On fracking for oil

One fracking optimist is Ed Morse, head of commodity research for Citigroup, frequently interviewed on CNBC and quoted in the Wall Street Journal (WSJ). Along with the notorious corporate raider H. Boone Pickens[1] and Porter Stansbury (“The Oil Report”), he is a cheerleader for “Saudi America”. Morse thinks US oil production will surpass that of Saudi Arabia by 2020, based on continued growth of the shale “fracking” sector (and oil from Canadian tar sands). He foresees declining US demand (due to increasing efficiency) and a declining rate of economic growth rate in China, resulting in an “oil glut” by 2020 with prices down by 20% from present levels. The US Energy Information Agency (USEIA) and the International Energy Agency (IEA) both accepted this view in 1910-11, resulting in (or, at least followed by) a huge boom in the shale business, focused mainly on gas.

However, other experts disagree. Andrew Hall, formerly a trader for CitiGroup, now CEO of Phibro, the trading arm of Conoco, has predicted that oil prices will rise above $150/bbl in the near future.   In an interview with the Association for the Study of Peak Oil (ASPO) in March 2014, ex-Aramco geologist Dr. Sadad-Al-Husseini predicted that oil prices would spike at $140/bbl by 2016-17. (In March 2014 the price of Brent crude was about $108/bbl., by November 2014 it was down below $90/bbl.) In the interview his 2009 output projections were compared to March 2014 actuality. North American production was above projection by 2.631 Mb/d and the Middle East was above trend by 1.183 Mb/d. Asia was slightly above projection by 0.32 Mb/d. All other regions were lagging below forecast outputs, notably Africa (-1.922 Mb/d) and South America (-1.069 Mb/d) with Europe at -0.461 Mb/d.

The below-expected output from Africa (Libya) is obviously attributable to political uncertainty, especially the aftermath of the overthrow of Khadafi) and the lag in expected South American output can be attributed to the Chavez-era turmoil in Venezuela. Obviously there is a chance that the political uncertainties in North Africa (and Iraq) will go away, resulting in higher output during the coming decade. Evidently several countries are producing less than they once did and probably could again. But the geo-political uncertainties, such as the current situation vis a vis Russia and the Ukraine could also spread and get worse.

John Watson, CEO of Chevron, has said in recent interviews that $100/bbl is “the new reality” in the oil business and that “costs have caught up to revenues for many classes of projects.” It is being said that $100/bbl is now OPEC’s “threshold of pain” because many oil-producing countries are now earning less from petroleum sales than their budgetary requirements. The weighted average of OPEC member’s receipts in 2013 was $106/bbl. But as of late September 2014, the average prices received by OPEC members was down to $98.63/bbl. Iran, Iraq and Nigeria are all earning less than they are spending.

The costs of maintaining existing wells and discovering new ones keeps rising faster than revenues. In fact, costs have outpaced revenues by 2 to3 percent p.a. for the past decade, or more. Profitability is down by 10 to 20 percent p.a. Most oil companies now need to recover more than $100 per barrel for new wells to achieve positive free cash flow. Half of the oil industry now requires $120 and the bottom quartile in profitability terms requires $ 130/bbl. Figure 4  below shows the situation for many producers as a graph (Kopits 2013).

ayres future oil prices fig. 5

Figure 6 below, from Deutschebank, is a cost curve for future oil supplies in terms of averages for regions, assuming open access to available reserves at a given price. For instance, Canadian tar sands are only viable at prices above $90/bbl. Thus, if oil prices rise dramatically, as some experts like Andrew Hall expect, virtually all the existing proved and probable resources will be economically viable. In that case, production becomes highly profitable. But in that case oil consumption per capita will fall, and the global economy will suffer.  If efficiency gains in the auto industry causes a further sharp drop in demand – as seems to be happening in late 2014 – it could bring prices down enough to drive a lot of producers out of the business.

Figure 6: Low Cost curve of future oil supply

ayres future oil prices fig. 6

The two cost curves shown above (Figures 5,6) indicate that available reserves and future supply are very sensitive to production cost. If Chinese (and other developing countries) economic growth accelerates a little bit from current (2014) levels, global demand for oil will certainly drive prices higher. But a slowdown in China (such as we see in 2014) may cut demand to the point where many oil producers have to operate below cost. Some (including some shale plays) may have to go out of business.  This is important for explaining fluctuations in the stock market. But what does it mean for long-term global economic growth? How much of the existing reserves can never be burned and must therefore be regarded by shareholders as “stranded assets”? These questions are moot.

A recent report to the Columbia University Earth Sciences Center tries to answer this question (Kopits 2013). Here are the main points:

  • Global output from conventional (“legacy”) terrestrial and offshore sources of crude oil, plus natural gas liquids (NGL) peaked in 2005 at 84.5 Mb/d. The increase in total liquids (including NGL) since then was 7.5 Mb/d. All of that increase was from unconventional sources in the US and Canada.
  • If global liquids supply had increased at the previous historical rate (75% of the GDP growth rate) then liquids supply from 2005 through 2013 would have grown by between 12 and 18 Mb/d, depending on the assumed rate of efficiency increase. A 2.5 % gain in efficiency would be consistent with a total increase of 12 Mb/d; an efficiency increase of half that amount would be consistent with a supply increase of 18 Mb/d. The actual supply increase was just 7.5 Mb/d. (Does that mean there was no increase in efficiency?)
  • Capital expenditure (capex) by the oil industry to maintain (and increase) output from those “legacy” sources from 1998 to 2005 was $1.5 trillion. Output increased by 8.6 Mb/d during those years.
  • Capital expenditure (capex) from 2005 through 2013 was $4 trillion (of which $ 1 trillion was spent to maintain and upgrade the gas distribution system). Of that, capex on non-conventional oil and gas, including tar sands, fracking, liquefied natural gas (LNG) and gas-to-liquids (GTL) amounted to about $500 million. There was no increase (actually a slight decrease) in output from the legacy sources, which remained near the peak 85 Mb/d level. In fact legacy crude oil production is down 1 Mb/d since 2005. All of the increase in total liquids output was in the US and Canada, and all of it was unconventional.
  • Costs of maintaining the legacy production system are rising rapidly (as the CEO of Chevron recently acknowledged). Many fracking (and other) projects outside the US have been cancelled or shelved in recent months due to cost overruns. The “super-giant” Kashagan oil field in Khazakstan (in which $50 billion has already been invested by Exxon, Shell, Total and others) is far behind schedule due to a variety of problems, such as pipe corrosion by hydrogen sulfide.

What does future liquids supply look like from the oil company or academic perspective?  In 2012, Exxon forecast 107 Mb/d by 2040. Other Mb/d forecasts made in 2012 were: IEA (103-106), BP (96-103), Total (95). IEA did a forecast of 96 Mb/d in 2011. In 2010 the Swedish expert Kjell Aleklet at Upssala University forecast 75 Mb/d, excluding shale (Aleklett 2010). It is interesting, in this context to compare three scenarios for future Chinese motorization demand (Figure 7, below).

ayres future oil prices fig. 7

The three scenarios are as follows: (1) China follows Japan (1960-1973), (2) China follows Korea (1976-1996) (3) China stays on a slow linear growth trajectory as projected by the Energy Information Agency (EIA) back in 2010. In the first case, Chinese demand will increase from less than 15 million barrels per day (Mb/d) now (2014) to between 50 and 55 (Mb/d) by 2022 or so, and a much higher level by 2030. If China is like Korea, it will reach the 50-55 Mb/d level in 2030. If the EIA (2010) was right, Chinese demand now would only be slightly above 10 Mb/d and by 2030 it will only be about 15 Mb/d. This seems inconsistent with China’s sustainable growth rate, which is still of the order of 7.5 percent p.a. (having fallen below the ten-plus percent p.a. of the last two decades. But if other developing countries, such as India, “motorize” anywhere near as fast as Japan, Taiwan and South Korea did, then non-OECD demand could be as high as 60 Mb/d by 2030 (which is still only two thirds of current OECD demand). The demand forecasts, even by the most conservative groups (EIA) are far above the supply forecasts. How can this discrepancy be resolved? Part of the answer has to be that OECD – especially the US and Europe — consumption will (must) decline significantly by 2030, allowing Chinese and other non-OECD demand to increase. The mismatch between supply expectations and likely demand from the non-OECD countries is shown in Figure 8 (from Kopits)

ayres future oil prices fig. 8
Adding it up, the overall capex picture looks like Figure 9 (Kopits) below : Legacy crude has been declining since 2005, while capital expenditures (capex) have risen five-fold since 2000. This is not a “blip”. It is more like a game changer

ayres future oil prices fig. 9

And what does this mean for future prices? In Figure 10 (Douglas Westwood), shows how future global demand might be met by likely supply. Evidently it depends on declining US and European (OECD) demand. But even so, there is not much room for Chinese demand to increase, especially if oil prices rise. But why should OECD consumption decline? The answer is, again, that it is unlikely to happen unless prices rise. Demand for any commodity depends on its price (just as the price depends on demand). If demand falls, prices will fall, and if demand increases, so will the price – other factors remaining equal. Kopits thinks the price of oil must increase to reconcile this difference (Kopits 2013). I agree. Reconciling projected global oil supply with projected global oil demand, by region,  leads to Figure 10, below. N.B. the increasing share of the United States projected in Figure 10 is predicated on a continued growth in output of shale oil, together with a relatively slow increase in end-use efficiency. My own prediction would reverse the US and Chinese shares.

ayres future oil prices fig. 10

 Economic implications

Another brief digression seems pertinent. I  have argued elsewhere that economic growth since the industrial revolution and through the 1990s (perhaps until 2005) was essentially demand limited, rather than supply limited as was the case before the industrial revolution and the substitution of coal for firewood and charcoal and the substitution of steam-power for horse-power, (Ayres 2014 ). Fuel prices and the cost of useful work (power) have been declining rapidly, on average, ever since the eighteenth century (Figure 11). This decline in the cost of doing work has generated the enormous economic growth of the 19th and 20th centuries. In fact, most of the products and industries that have driven economic growth are, themselves, consequences of innovations needed to overcome the technological challenges that arose originally in connection with the substitution of coal (as coke) for charcoal in iron-making. But they, in turn, created new products and new industries:  in short, those innovations, including the later substitution of steel for iron, rock oil (petroleum) for whale oil, electric power and automobiles for horse-drawn carts followed.  From a top-down perspective, it can also be said with some confidence that during those centuries of rapid growth (exergy) was never an economic constraint. Growth was driven by demand, and supply always followed.

Figure 11

ayres future oil prices fig. 11

If declining cost of doing work was the major cause of economic growth since the industrial revolution, it follows logically that scarcity of available exergy in the future would raise the cost of doing useful work and thus limit future economic growth. At present most of the exergy consumed by our industrial civilization is derived from those fossil hydrocarbons whose exploitation kicked off the industrial revolution. Doesn’t it also follow that “peak oil” will be followed by a slowdown in economic growth? The world seems to be experiencing just such a growth slowdown: “secular stagnation “ it has been called. Yet mainstream economists – so far – have seen no connection with resource constraints  (“peak oil”).

To be sure, oil is not the only fossil fuel, but It is convenient to refer to petroleum (or oil) as a proxy for all the fossil fuels. The reason is that only petroleum products (apart from ethanol) are liquids. This fact makes them uniquely convenient to ship and to carry in vehicular fuel tanks. And, all but a tiny fraction of all transportation equipment (as well as equipment used in construction, mining and agriculture) are powered by internal combustion engines – whether spark-ignition, diesel or gas turbine — that depend on liquid fuel. [2]

Several questions then arise: will fossil hydrocarbon fuels soon become economically scarce (i.e. will prices rise?) Prices must rise if costs rise, and costs are rising. A barrel of oil was worth $0.10  back in 1931 after the discovery of  the East Texas field. That barrel cannot be replaced today for much less than $100. True, a 1930 dollar was worth $10 of today’s dollars, and the price in 1931 was below cost, but the cost increase for new oil wells since then must be between 20-fold and 50-fold. That might seem to settle the question. However, it doesn’t, quite, because there is still a lot of cheap, easy to produce  oil left in the ground in some locations (notably the Middle East) many of which are politically unstable. The history of the near and medium term future may be dominated by a struggle to control that cheap oil, not only in the Persian Gulf and around the Caspian Sea, but in the Sudan, Sierra Leone, and the South China Sea. In fact, Michael Klare (and others) have argued that the world is heading for a global conflict for access to oil {Klare, 2001 #2911}.

My view follows from several lines of reasoning. One that has been given very little attention so far by mainstream economics is the fact that the average energy return on energy invested (EROEI) has been declining since the 1930s. In fact, if we had earlier data, we would probably see that it has been declining most of the time since 1860, but with interruptions for momentary “spikes” due to occasional large oil discoveries e.g. in Azerbaijan, Texas, Kuwait, Iran, Mexico, Venezuela, California, Texas again, Saudi Arabia, and a many more smaller discoveries since then. However, really big (“super-giant”) discoveries, such as Alaska North Slope and the North Sea have been getting scarce.

In 1932, after the East Texas bonanza, the number of barrels of oil produced for each barrel (energy equivalent) needed to dig the wells and transport the product to a refinery was over 100. By 1980 the global average was down to 30 or so. Currently, the global average is thought to be around 20 and the oil from tar sands and deep ocean drilling probably has an EROEI of less than 10 (perhaps even as little as 5 (Hall 2008; Hall and Day 2009). As noted in the discussion of shale oil, previously, the EROEI for that is between 1.5 and 1.7. See Figure 12 below. Of course these figures are crude and subject to error, but the trend is clear.


ayres future oil prices fig. 12

A more recent and detailed analysis of EROEI was published recently (Hall, Lambert, and Balogh 2014). A few points are worth mentioning here. All figures are estimates, of course. From 1999 to 2006 the EROI for global oil and gas production declined by nearly 50% from 35 to 18. From 1993 to 2009 the EROI for natural gas in Canada fell from 38 to 20. The EROI of nuclear power ranges from 5 to 15. The EROI for conventional hydropower is greater than 100; for wind turbines it is about 18; for PV it ranges from 6 to 12. Ethanol from sugar cane ranges from 0.8 to an upper limit of 10. Ethanol from corn is 0.8 to 1.6 while biodiesel (from rape or sunflower oil) is about 1.3. (It is fairly obvious that the US subsidy for ethanol from coal is a political bribe to Republican corn farmers, since it makes no sense from an energy perspective.)

The following (and last) figure in this report is a collage of “official” forecasts, mostly collected by surveys of express, by various groups. Only the Douglas-Westwood forecast (based on the Kopits analysis) foresees rising prices. As mentioned already, as this is written, oil prices have actually come down by almost 30% from the 2011 peak. However, it is important to realize that the price of oil never changes steadily in one direction for a long time. It has always been volatile and this will continue, because of the extreme sensitivity of economic activity to the spot-price, as amplified by the activities of speculators (gamblers). I think that as soon as economic growth accelerates again, as it should, the price of oil will rise rapidly, to new highs. I think 2018 would be a good guess for when this reversal will take place.


ayres future oil prices fig. 13


Note that the Douglas-Westwood (DW) forecast is quite similar to the Kumhoff (IMF) forecast. To summarize, we think that the price of oil will rise in the coming years despite the fracking boom in the US, because of increasing demand from China and other developing countries will soak up any increased output.

It follows that efficiency gains will have to be the primary drivers of future economic growth, because as the cost of exploration and discovery rises, investments in end-use efficiency look like being the cheapest way to make more hydrocarbons available for consumption.


# # #


Addendum. On (temporarily) low oil prices.


Some older folks among us will recall a period of very low oil prices starting after 1983, with a bottom in 1986-87. (That bottom corresponded with the lowest unemployment of the Reagan Administration. OPEC oil production was rising during those years (thanks to West African investments induced by the high prices of 1979-82. Meanwhile Soviet output, which was around 4-4.5 million barrels per day in the early 1980s declined precipitously after 1987. That combination of events cut Soviet hard currency income drastically. It forced the USSR to cut back its overseas activities in Cuba, Angola, Afghanistan and elsewhere. This was followed by the political collapse of the USSR itself in 1988-1990.  There is a fairly plausible conspiracy theory that these events were orchestrated by the CIA with help from Saudi Arabia, the swing producer.

The pattern may be repeating itself. Once again there is an unfriendly and belligerent regime in Russia, challenging the European Union, and using gas supplies as a “weapon” backed up by low level military support for Russian-speaking secessionists. This neo-Soviet regime, also financed by hard currency from oil (and gas) exports, is putting pressure on former Soviet Republics,  especially the Ukraine, but also eastern Europe.  Meanwhile, the extremist “Islamic State” (ISIS) which rapidly over-ran  much of eastern Syria and west-central Iraq in the late spring and early summer of 2014, is also being financed by the sale of captured oil and gas. The principal targets of ISIS are Saudi Arabia and the wealthy Gulf States, all dependent on oil exports. ISIS is now being formally opposed by a coalition of 40 countries, including most of the ISIS targets. Only a few of these coalition partners are contributing militarily, mainly the US and France while the most effective anti ISIS “boots on the ground” at the moment are the Kurds.

I cannot help wondering if the recent fall in oil prices, which started in June 2014, is a coincidence. It  is certainly  due to a glut. Was the glut deliberately created by the big exporters, especially Saudi Arabia and the Gulf States (coordinated by the CIA)?.  It will cut the hard currency income of both ISIS and Russia, as well as providing relief for US and European, not to mention Japanese and Chinese consumers. It will cut the profits of the big oil companies, but none will suffer greatly. It will also hurt some of the smaller energy companies, such as shale “frackers”, especially those with heavy debt loads.

If the oil price decline is a plot to punish Putin and starve ISIS, will it work? Only time will tell. But, most of the analysts expect oil prices to be back over $100/bbl by next summer, simply because the major exporters need the high prices to balance their budgets – and because the costs of drilling and fracking are very high and rising all the time. If OPEC cuts output to raise prices, as many expect, the “plot” (if it is one) will probably have failed.

Interesting times.

# # #



Aleklett, Kjell. 2010. Peak Fossil and the Human Well-being Equation. In KVA Stockholm Seminars. Stockholm.

Ayres, Robert U. 2014 The bubble economy. Boston MA: MIT Press.

Barnett, Harold J., and Chandler Morse. 1963. Scarcity and growth: The economics of resource scarcity. Edited by H. Jarrett. Baltimore MD: Johns Hopkins University Press.

Hall, Charles A. S. Why EROI  Matters (part 1 of 6). The Oil Drum 2008 [cited. Available from

Hall, Charles A. S., and J. W. Day. 2009. Revisiting the Limits to Growth after Peak Oil. American Scientist 97:230-237.

Hall, Charles A.S., Jessica Lambert, and Stephen B. Balogh. 2014. EROI of different fuels and the implications for society. Energy Policy.

IPCC. 2007. Synthesis Report. In IPCC Assessment Reports. Cambridge, UK: Intergovernmental Panel on Climate Change (IPCC).

———. 2014. IPCC Fifth Assessment Report: Climate change: Cambridge University Press.

Kopits, Steven. 2013. Oil and economic growth: A supply constrained view. New York: Douglas-Westwood Inc.

Kumhoff, Michael. 2012. Modelling challenges for the near future: Income inequality, financial systems and exhaustible resources Washington DC.

Simon, Julian L. 1996. The ultimate resource 2. Princeton NJ: Princeton University Press.


[1] Pickens was a wildcatter and founder of Mesa Oil Co. His financial engineering forced Gulf Oil into the arms of Chevron in the mid-80s and originated the phrase “drilling for oil on Wall Street”.

[2] Both coal and natural gas can be liquefied, but only at high cost and significant emissions problems. This difficulty also applies to Canadian tar sands.

# # #


About the author:

ayres bw smallRobert Ayres’s career has focused on the application of physical ideas, especially the laws of thermodynamics, to economics; a long-standing pioneering interest in material flows and transformations (Industrial Ecology or Industrial Metabolism); and most recently to challenging held ideas on the economic theory of growth.

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