Last week a Bloomberg writer at the very end of an article explained that the “only solution” to high gasoline and diesel prices is recession. While I would not accuse the writer of advocating degrowth—this would be too radical for a mainstream business publication—his analysis points to a key and obvious cause of today’s high prices for oil and other commodities: There isn’t enough of them to go around.

There’s an old saying in the oil industry that the solution to high prices is high prices. The logic is that high prices will do two things: 1) Reduce demand as those who cannot afford oil products at high prices will cut back and 2) incentivize more exploration and production as companies seek to increase production to take advantage of high prices.

The big question today is whether the second mechanism can actually ramp up oil production enough to bring down prices. In a recent survey a large number of oil executives said their production plans do not depend on current prices. Many cited the desire of investors in publicly traded companies to receive larger dividends and benefit from the corporate buyback of shares (which tends to increase the stock prices as fewer shares are available for trading).

It’s instructive that 9 percent of those responding to the survey cited an oil price of $120 per barrel as the level at which they would consider raising production. And keep in mind that they are NOT talking about $120 per barrel for a few months, but as an average price over many years—since it can take many years to bring large projects into production and those projects can produce for many years after production begins. If this is the hurdle even one-tenth of the world’s oil producers believe they face, it does not bode well for increasing production substantially.

“Environmental, social and governance issues” were cited by only 15 percent of the executives for restrained production. I have long contended that to the oil industry these issues are merely part of the cost of doing business. If prices are sufficiently high to overcome these costs—that is, to pay the extra cost of compliance—the industry will drill for new oil.

But that doesn’t seem to be happening even with oil prices this high. One executive told Bloomberg: “Whether it’s $150 oil, $200 oil or $100 oil, we’re not going to change our growth plans.”

If oil executives are not responding to high oil prices the way that they used to and insisting that even prices twice today’s will not move them, there might be another force at work, namely, geology. It is becoming more and more expensive to extract the oil that is left.

Those following the industry closely enough already know that oil from shale deposits in the United States is more expensive to extract than conventional oil. The same is true of oil from tar sands found in Canada.

A straw in the wind if there ever was one is Shell’s abandoned effort to find oil in the Arctic off the coast of Alaska. The company stopped its Arctic project back in 2015 after spending $7 billion. The company cited environmental regulations. But, as I say, those are really just a cost of doing business. With high enough prices, a company will simply pay the costs of compliance. Perhaps just as important were the logistical challenges and harsh conditions. The Arctic project stumbled in 2012 when a large platform ran aground and stalled operations for almost three years.

Deep shale oil wells, tar sands, the Arctic and deepwater offshore oil are the new frontiers for oil exploration. That new frontier is more expensive and more technologically challenging. The recent comments of oil executives may be a tacit admission that limits are upon us in oil. And, there may be no better illustration of those limits than the fact that world oil production—using the standard definition of oil which is crude oil including lease condensate—peaked in November 2018, long before the COVID pandemic destroyed oil demand. Even with today’s renewed red-hot demand for oil, production remains substantially below that peak—79.6 million barrels per day (mbpd) versus 84.5 mbpd at the peak in 2018.

It’s true that oil prices substantially higher than today’s might change these executives’ minds. But prices of say $150 or $200 per barrel would almost certainly induce a deep recession that would result in plummeting oil prices. And, that means that such price levels are not sustainable. It’s a pretty good illustration of the limits we now face.

Image: Exxon desert tanker. Satirical image created in Photoshop to illustrate the concept of peak oil. (2007)  by azrainman via Wikimedia Commons https://commons.wikimedia.org/wiki/File:Exxon_desert_tanker.jpg