What had been billed as the highlight of the week, in the end, turned out to be something of damp squib. The Federal Reserve cut interest rates by a quarter-point, spoke at length on a troubling employment market and once again rammed home the notion that its membership would be unhurried in decision, and take each future one on the basis of contemporary data. The ‘dot plot’ is now predicting another two similar cuts before the year is out, but if the best Jerome Powell can do in being dovish in his post-decision press conference is to instruct his avid global listeners to think of the rate adjustment as a “risk-management cut”, little wonder markets squeaked in reaction rather than roared. 

Frankly, the in-house drama at the FED ended up being more interesting than what turned out to be a grey and dreary outcome. The unsackable Lisa Cook obviously voted with the rest of the board and the newly gowned governor Stephen Miran, one of Donald Trump’s tariff architects on the Council of Economic Advisers, played to form and dissented in favour of a half-point rate reduction. The most significant outcome of this meeting is how the FED still holds onto its independence, but the future dot plot might not be as interesting in how the gerrymandering of the board’s make-up might just challenge autonomy. 

The almost ‘whatever’ reaction from markets should come as no surprise bearing in mind the 25-basis point cut was fully ‘priced-in’ and arguably so are the next expected four reductions going into 2026. Yet, a lower interest rate path, as sloth-like as it may be, is likely to be a confirmation to US stock market investors that easier money and therefore more investment creeps a little closer, and their fervent commitment to equities will be retained.

It has always been about the price

It has been a while since someone dare utter the almost blasphemous concept of peak oil. We certainly are not prepared to walk that minefield of derision and risk the rotten tomatoes which would rightly greet us in barrages from the bleachers of oily types. Our view has always been that the end of the oil age would be all to do with price, and never if the globe would run dry of our favourite commodity. Those who had been historically convinced by the flawed argument of a near-at-hand depletion of oil reserves, developing a latent antipathy towards the black stuff, are arguably now those which have switched their bias on fossil fuels being of satanic design and all energy should be of the ‘green’ kind. It has been quite the year for those who worship at the altar of renewables. Company after company have abandoned their conversion dates and time limits for ‘net zero’, whatever that psychedelic over-used term means. ‘Necessity is the mother of all invention’ so the abused Plato saying goes, whatever form of power lies in wait for humans in the future, it will reveal itself when oil is just too expensive to compete. 

As seen in the Financial Times last month, Wood Mackenzie estimates a slower transition could leave the world needing about 5 percent more oil per year than previously forecast from the mid-2030s. The energy consultancy forecasts the world will require more than 100 billion extra barrels of oil and gas from exploration by 2050 to help fill this gap.

However, our bias, and biased we be, should not prevent a time-to-time look at what might just do for oil consumption in the far-off end or indeed, make it so expensive as to no longer be viable. As much as there might be rich geological lodes across the globe steeped in oil, the cost of getting it from its subterranean dormancy to a piston powering state in an engine, is seeing a dramatic rise, particularly in mining. The prolific and successful shale and fracking extraction seen in the United States has been the biggest driver in keeping oil prices competitive and the singular reason OPEC’s control has been relinquished. But, even with the advent of AI and other advances which have improved drilling techniques and enabled further development in complicated mining such as lateral drills, costs continue to rise. 

The International Energy Agency, no stranger to anti-oil sentiment, has recently softened its stance, recognising the need for consistent oil production while its hallowed leap to alternative energies suffers a prolonged incubation period.  The Paris-based advisory this week warned on how a reliance on shale production and deep-water drilling is storing up problems as capture from maturing fields is becoming more problematic and therefore, expensive. It has to be said, and as pointed out by an OPEC critique, it does take some chutzpah from the IEA to caution on under-investment in oil. It did after all warn of peak oil demand in 2021 and with the audience it wields, would have most certainly contributed to investment withdrawal from the oil industry. 

But the IEA can never be discounted, it is a considerable force in energy information resource and at present it is highlighting oil production issues. As seen on various outlets, drawing on data from about 15,000 oil and gas fields around the world, the IEA said that after reaching peak production the average annual decline in output was 5.6% for conventional oil fields, and 6.8% for conventional gas fields. Such degradation is the equivalent of Brazil and Norway's combined oil production each year, some 5.5mbpd, with implications for markets and energy security, because 90 percent of all upstream investment goes against nursing current production rather than looking for new areas that could service future demand. 

Therefore, an inordinate amount of the value of one barrel of oil goes into finding the next as the costs of exploration, drilling, transportation et al continue to climb. Each cost would be peculiar to a project, and of course what the current price of Crude at the time might be. This then seems to be an exponential threat to oil mining because at some point the costs of extraction will preclude profit. As far away as this scenario might just be, it is worth more than just a passing consideration.

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