This is not a joke, but neither should you worry if you are long oil, as the price will most likely hit (at least) $100 long before it heads south, and that is due to a rising deficit between oil production and new oil discoveries (exhibit 1).

I should also point out that, strictly speaking, I should have said fossil fuels, not oil, in the headline above, but there wasn’t enough room for all those extra characters! In other words, what I meant to say is that fossil fuel (oil, gas and coal) prices will most likely approach $0 over the very long term.

Just to complicate matters even further, strictly speaking, not even that is correct. What will happen to fossil fuel prices in the future is anybody’s guess, but what almost certainly will happen at some point is that demand for fossil fuels will approach zero.

Now to why that is. To begin with, a reminder. Energy is critical to everything we humans do. Without energy, we would soon run out of things to eat; we wouldn’t be able to use our iPads – a device that appears to be more important than food to many youngsters these days – and industry would die virtually overnight. Economically, nothing is more important than energy.

Phrased slightly differently, one could say that GDP simply cannot grow at a reasonable rate without access to energy at a reasonable cost. In that context, I note that, in the US, it requires 31 times more capital stock to extract a barrel of oil today than it did in 1977, just before ‘everything’ started to decline (exhibit 2).

What do I mean by that? Back in December last year, I first touched on the subject of declining ‘everything’. GDP growth is in decline – both in nominal and real terms – and has been in decline since the 1970s; productivity and workforce growth the same. Inflation is falling; consequently, interest rates are declining, and equity markets have also delivered more modest returns in recent years.

The problem in a nutshell

The problem in a nutshell is the geological depletion of existing fields and the growth of higher cost, geologically less attractive, fields. While drillers are more efficient today than they were, say 40 years ago, the increased share of more complex fields has dramatically increased infrastructure requirements.