There are few prices more critical to the global economy than the price of oil – once again highly topical – and few industries more shrouded in mystery than the oil industry.

This short book, a collaboration between a young researcher at Curtin University and a veteran Swedish commodity economist, takes a fresh look at recent developments in oil, stripping away the mystique and challenging some widely-held misconceptions. It is a book anyone with an interest in the long term prospects for oil would do well to read.

The book rests on two key claims.  First, that the role of the OPEC cartel in supporting oil prices has been massively overstated.  Much the biggest factor behind the persistence of high oil prices (until recently) has been supply constraints rooted in politics.  The widespread nationalisations of the 1970s placed much of the world’s oil production in the hands of governments which, because of their inexperience and the wide range of pressures on their budgets, failed to invest sufficiently in new industry capacity. Regional conflicts, such as those involving Iraq, cost the industry still more output. Exponents of ‘peak’ oil who claim that depletion has played a part in constraining oil supply get short shrift from the authors.

The second claim of the book is that the twin developments of horizontal drilling and hydraulic fracturing – ‘fracking’ – have transformed the economics of shale oil production.  They are also playing an important part in improving recoveries from conventional oil fields.  Up to now this has been largely confined to the US but the authors see no reason why this revolution should not, over time, extend to other countries.  They provide reasons why they think the environmental impacts of fracking are manageable.  A consequence of rising supply from these new sources is that oil prices in the future are going to be far, far lower than the big forecasting agencies such as IEA and EIA have been projecting.  

The collapse of oil prices since the latter part of 2014 has meant this decline in oil prices came a bit sooner than the authors had been anticipating.  Nonetheless, the resilience of shale oil production in the face of weaker oil prices would generally seem to support their thesis.

The final part of the book focuses on the implications of lower oil prices on the economics of producing and consuming countries and policies for climate change. Whilst interesting, the huge uncertainties surrounding these topics make this part of the book a bit more speculative.

The key contribution comes in the first two parts of this book.  The authors’ message is delivered in a tight, readable and robust fashion, with clear signposting of the arguments along the way.  As impressive as the clarity of thinking displayed in the book and the compelling nature of the authors’ arguments is the surgical precision with which they dismember some of the industry’s most cherished conventional wisdoms.  This is a voice that deserves to be heard in the debate about the future of oil investment and by those designing energy policy.