Cartel to improve the energy return on investment

Between the two world wars, when the handful of major oil corporations controlled the total market, rivalry led to a price war, which culminated in a major conflict between Shell and Standard Oil (Exxon) in India during 1927 and 1928. ^{Reference Stevens25} In 1928, representatives of Standard Oil, Shell, and BP met secretly at Achnacarry Castle, Scotland, to address the situation by forging a secret cartel agreement. A BP-authored draft of this agreement states that because the petroleum industry could not earn a sufficient return on its investment in a competitive environment, the three oil companies would divide the world's markets among themselves, to limit production and maintain prices. ²⁷ By preventing the emergence of market competition, they ensured extraordinary profits to those who controlled the cheaply produced oil of the Middle East. ^{Reference Mitchell26}

Resource nationalism

In the 1950's and 60's, producer governments tried to regain control of their resources, as in the example of Iran. In 1951–53, Iranians elected Muhammed Mossadegh, a leader of a secular democratic party, as Prime Minister. Negotiating between an emerging labor movement in the Iranian oil industry and BP, Mossadegh nationalized the oil industry, but with terms more favorable to BP than those advocated by the labor representatives. The international oil companies (IOCs) boycotted Iranian oil and the British blockaded exports at the refinery at Abadan, which threw Iran into an economic crisis and weakened the government. An Anglo–American military coup unseated Mossadegh's parliamentary-based government, restored and enhanced the oligarchic rule of the shah, and violently repressed political dissent. ^{Reference Mitchell26} In the following decades, the oil producing countries eventually nationalized their oil and gas resources and formed OPEC as a counterweight to the ‘old guard’ independent oil companies. Currently, the IOC's control about 10% of the world's reserves. ^{Reference Myers and Soligo28}

National political frameworks

National political frameworks still routinely facilitate IOC's bargaining power with foreign governments. When BP was courting Azerbaijan for access to the Baku oilfield's in Azerbaijan, just after the Soviet Union broke up, the British government flew Margaret Thatcher in to visit the newly formed government in Azerbaijan and to witness the signing of the memorandum of understanding between the Azeri National Oil Company and BP. The deal, known as the ‘contract of the century’ was signed two years later, with BP as the head of the consortium, and the Azeri national oil company entitled to only a fifth of the oil developments. Parallels have been drawn between this contract, achieved for a private oil corporation through state foreign policy frameworks, and those made in the years between the world wars. ^{Reference Marriott and Minio-Paluello29,Reference Blair30}

National security

Now no less than earlier, oil remains a central economic and political factor, worthy of military involvement to secure. ^{Reference Tétreault31} The Institute for the Analysis of Global Security, headed by former National Security Advisor Robert MacFarlane, estimates that the 1990–91 Gulf War, to resolve an oil dispute between Iraq and Kuwait, cost the international community about $80 billion. The cost of the 2003 Iraq war and the following occupation of the country is estimated at $200 billion. ³² The costs associated with US military operations in the Persian Gulf between 1976 and 2007 were estimated to total $6.8 trillion (2008$), which includes 500 billion spent in 2007 alone. ^{Reference Stern33}

These examples show that oil is deeply entwined in the national security interests of states, and as such is not a simple market commodity. The IOC's did not achieve their current state of predominance by the level rules of fair market competition. To stifle competition and achieve a better return on their investment, they formed a cartel. Market control through cartels is still emblematic of the oil & gas market. These industries have been supported with government national security frameworks that have promoted and guarded their interests since the end of WWI. While the expense of this support has been estimated from time to time, the actual accounting remains nontransparent. This history of exploitation of oil resources for the benefit of the dominating economies is a lingering issue, which presently comes to light in the discussions over how to pay for mitigating climate change. Not only has the fossil fuel industry enjoyed the privileged institutional support, they have also received many subsidies.

Producer subsidies

Producer subsidies for the exploration of oil, gas, and coal have been estimated to be about $90 billion in the G20 nations in 2013. ^{Reference Bast, Makhijani, Pickard and Whitley35,36} Another study found that the top 10 EU member states (by GDP) have allocated at least €78 billion to fossil fuel production subsidies over the last 13 years. ³⁷ The $5.1 billion in national exploration subsidies provided by the US in 2013 was almost double the 2009 level. The UK has been providing subsidies, of up to $1.2 billion a year, for offshore and unconventional gas and oil exploration. The subsidies of governments to their own state-owned oil & gas enterprises ranged from $2–5 billion in Russia, Mexico, India, $9 billion in China, $11 billion in Brazil, to $17 billion in Saudi Arabia, totaling $43–52 billion. ^{Reference Bast, Makhijani, Pickard and Whitley35}

Since the beginning of the nuclear age, the American government has subsidized uranium mining, milling, and enrichment as well as fuel fabrication for the dual purpose of developing both nuclear weapons and nuclear energy capability. There are three main types of subsidies for uranium fuel production in the US that come from the ‘depletion allowance’, the permission to extract minerals from public lands without royalties, and insufficientFootnote ** requirements for post-mining restoration. ^{Reference Koplow38} The depletion allowance is a subsidy for investments in depletable resource extraction, and is estimated to have amounted to about $25 million per year for companies operating in the US in the general period between 2000 to the present. The US Mining Law of 1872 allows ‘hardrock’ minerals, including uranium, to be extracted from federal land without royalties, and allows the user to privatize the land for only a few dollars per acre. ^{Reference Koplow38}

Subsidies through ECAs

ECAs are publicly financed banks, (in both OECD and non-OECD countries) that use taxpayer money to provide government-backed loans, guarantees and insurance to support their home industries to carry out projects overseas that are too risky for commercial underwriters. ^{Reference Ilias39} The global association of ECAs is the ‘Berne Union’, which, collectively in 2013 insured $1.9 trillion of exports and foreign direct investment (more than 10% of international trade), and indemnified $4.5 billion to exporters and investors, protecting them from losses suffered due to buyer defaults in all regions of the world. ⁴⁰ Indeed, the entire myopic focus of these activities has been on the benefit of exporters and investors, to the detriment of the people and environment of the host countries, and without the public consent of the funding taxpayers. ⁴¹

The total global government-backed export support in 2013, as estimated by the Ex-Im Bank, was 286 billion USD. Oil & gas and power plant projects account for about 20% of Ex-Im Bank's portfolio. ^{Reference Akhtar42} If the portfolios of other ECAs are similarly diversified, then about 60 billion USD are spent by ECAs on subsidizing oil & gas and power plant projects each year.

One example of an ECA funded oil & gas project is the construction of the Baku–Tbilisi–Ceyhan oil pipeline from the Caspian Sea oilfields in Azerbaijan, through Georgia to the Turkish coast near the city of Ceyhan. The pipeline is owned and operated by a consortium of oil companies, with BP having the largest stake. Construction was started in 2002, and in 2003 Amnesty International rang the bell with a report stating that the mechanisms for protecting human rights were being systematically undermined. ⁴³ A report from a fact-finding mission was conducted by NGOs in 2004 and corroborates claims of human rights abuses, including infringement of labor laws, insufficient or lack of compensation for appropriated lands, repression of dissent, corruption, falsification of documents, silencing of the press, destruction of environment and infrastructure, and paramilitary coercion. ^{Reference Marriott and Minio-Paluello29,44}

More recently, Baku's city center has been undergoing a multi-billion dollar ‘face-lift’ with the construction of high-rent innovative buildings designed by Europe's best architects and funded with oil profits. The sudden oil wealth has reached only the select few. While the cost of living in the city of Baku is similar to that of most Western European cities, the average monthly Azerbaijani salary is not more than 350 euros per month. The countryside is still deeply underdeveloped with 42% of rural residents living below the poverty line. Apart from the export of oil and gas, no other industrial sectors have prospered and become competitive on world markets. ^{Reference Rousseau45} In Transparency International's 2015 Corruption Perception Index, Azerbaijan came in 126th out of 175 countries. ⁴⁶ In a 2015 report on freedom of the press, Azerbaijan is ranked among the worst countries (162 out of 180) for freedom of the press, as courageous journalists have to choose between staying silent, leaving the country or going to jail. ⁴⁷

Lawyers and NGO's have pointed out that the effective financing of these infrastructure projects by state funds (i.e., public money channeled through ECAs) carries with it obligations, under international law, to ensure human rights are safeguarded. They call for regulations that would make sure that the ECAs act in accordance with the international development goals. ^{41,Reference Sant'Ana48} Nevertheless, the ECA's facilitate corporate investment into situations that are too risky because of political instability or a host of other reasons. That corporations become threatened and then become entangled in human rights abuses must be due to outcomes that probably were, or should have been, considered from the outset.

Another tragic outcome of the ECA financing is that, in the event of a default on the payments for the home corporation's business activities, the debt is then assigned to the country's sovereign external debt. Sudan, for example, has a debt estimated at $43.7 billion. Because Sudan stopped servicing its debt in 1984, and because the interests on the loans are about 10% or more, the interests and penalties account for well over 80% of the total amount (i.e., ∼$35 billion). ⁴⁹

Subsidies for shipping

The US Energy Information Administration (EIA) estimates that 63% of the world's oil supply travels by ship. ⁵⁰ Oil tankers carrying 17 million barrels, or about 20% of the world's oil supply, pass through the Strait of Hormuz between Iran and the United Arab Emirates each day, and they are protected by the US Navy (Fig. 1). The cost of protecting oil transit has been estimated to be between $13 to $143 billion per year. ^{Reference Plumer51,52}

Figure 1. World oil transit chokepoints. ⁵⁰

The specific costs for military protection of chokepoints in oil shipping routes is not the only subsidy enjoyed by the shipping industry. Ships servicing the oil and gas industry, including tankers, gas carriers, and offshore vessels make up about 38% of the world's international shipping fleet. International shipping has mostly evaded regulation, in what appears to be a cat and mouse game, as ships can effectively choose the rules they want to follow. Ever since 1991, the International Maritime Organization (IMO), a United Nations agency, has been faced with the challenge of regulating the international shipping industry. Like trying to carry water with a sieve, the IMO may negotiate regulations, but does not have the mandate to enforce them. ^{Reference Strong53}

The nation where the ship is registered is the ‘flag’ state, which holds the power to enforce regulations. Not surprisingly, ships are registered with nations that provide ‘flags of convenience’, those that have the softest environmental and social requirements, low taxes, cheap registration fees and least interference in the shipping business. The ship registries in Panama, Liberia, the Marshall Islands and Hong Kong account for about 50% of the world's fleet. The conditions for workers on board ships registered under flags of convenience are precarious, with very low pay, poor on-board conditions, inadequate provision of food and clean water and long working periods without adequate rest. ⁵⁴

International shipping eluded the scope of the Kyoto Protocol and the climate impacts of the shipping industry have continued to grow unabated. In the EU, shipping is the only sector without a cap on emissions. ⁵⁵ Most marine engines are designed to burn the cheapest fuel, i.e. residual fuels such as heavy or intermediate fuel oil. Residual fuels are the dregs of the crude oil after the lighter hydrocarbon fractions have been separated out, and therefore contain a higher concentration of sulfur, ash, asphaltenes, and metals than crude oil. Air pollution from marine engines engineered for burning residual fuels include 17–31% higher NO _x emissions, 5–10% higher SO _x emissions than conventionally combusted oil, as well as toxics and heavy metals. ^{Reference Corbett and Winebrake56,Reference Merk57} Currently responsible for 3% of global annual greenhouse gas emissions (which is greater than the total annual emissions of Germany), maritime transport emissions are expected to rise to 5% of global emissions by 2050. This is not compatible with the Paris Agreement to keep global warming below 2 °C. ⁵⁸ Furthermore, shipping emissions in ports have been linked to respiratory disease, coronary heart disease, and premature births. It has been calculated that shipping-related particulate matter (PM) emissions are responsible for approximately 60,000 cardiopulmonary and lung cancer deaths annually, occurring near coastlines in Europe, East Asia, and South Asia. ^{Reference Merk57}

As a long-awaited agreement on monitoring, reporting, and verification on shipping emissions makes its way through the European Parliament, it is becoming more and more watered down. The need to monitor sulfur (SO _x ) emissions, as well as nitrogen oxide (NO _x ) emissions has been tossed out of the proposal, which is slated to come into effect next year, despite the fact that NO _x from shipping in Europe is expected to exceed all land-based sources by 2020. ⁵⁹ Weak agreements appear to be the norm. The new ‘Polar Code’ regulations allow vessels with inadequate structural reinforcements for icy conditions to operate in Arctic environments, and provide no forethought of the severe irreversible effects a single oil spill would have on the sensitive Arctic environment nor measures to take in the event of an oil spill. ^60,61 The hope, which had also been articulated by the European Commission, was that regulations for shipping emissions would be addressed at the Paris climate conference, but they were not included in the agreement. ⁶² Nevertheless, the UNFCCC and the IMO are scheduled to take the issue on at the next climate conference in Morocco in November 2016. ^{Reference Bisiaux63} The industry estimates that implementing regulations such as limits on emissions, the Ballast Water Management Convention, and the ILO Maritime Labour Convention will cost the shipping industry an estimated $500 billion over the next 10 years. ^{Reference Birkett64} The lax regulatory environment for international ships is clearly an economic benefit to the industry, and one that will require some enforcement mechanism to change.

Consumer subsidies

Consumer subsidies, or ‘pre-tax’ subsidies, are subsidies that lower the price for consumers and are worked out by comparing the price paid to the international market price, with the price-gap indicating the subsidized amount. The global consumer subsidies for 2013 have been calculated by both the IEA ($548 billion) and the IMF ($492 billion) to be about half a trillion US dollars. ^{Reference Bárány and Grigonytė65} The consequences of using the fuel, especially the environmental impacts, also have a price tag and are generally paid for with public funds. The IMF figures these externalities (added to their consumer subsidies) as ‘post-tax’ subsidies. The IMF's post-tax estimation of the sum of the consumer subsidy and the subsidy for the environmental impact of the use of the fuel comes to a staggering $4.9 trillion (6.5% of global GDP) in 2013, and is projected to be $5.3 trillion (6.5% of global GDP) in 2015. ^{Reference Coady, Parry, Sears and Shang66}

Table 1 summarizes the literature on fossil fuel subsidies. Subsidies that support activities to supply petroleum fuels, called ‘producer subsidies’, are estimated to be ∼$200–700 billion per year. ^{Reference Tagwerker34,52,54,Reference Birkett64} The total subsidy amount for fossil fuels in 2013, found by adding producer subsidies, and the amount for security measures for geo-political access, to post-tax subsidies, is in the range of $US 5.5 to $US 6 trillion dollars (Table 1). The global renewable consumer subsidies were only 22% of the consumer subsidies for fossil fuels, and the total renewable subsidies (US$ 120 billion) were only about 2% of the total fossil fuel subsidies in 2013.

Of the $5.3 trillion (6.5% of global GDP) that the IMF estimates are going to subsidize fossil fuels in 2015 for costs passed to society by environmental damage, roughly $2 trillion were due to oil and natural gas. ^{Reference Coady, Parry, Sears and Shang66,68} The IMF limits their scope to air pollution (and not to impacts on water or land), global warming and externalities associated with road traffic. The largest share, estimated to be almost 4% of the global GDP, or ∼$3 trillion, is due to coal. ^{Reference Coady, Parry, Sears and Shang66}

Considering that roughly 70% of newly produced fuels cannot be burned, and are therefore not likely to be valued, and in view of the investments needed to transition the global society to a more sustainable energy supply, the continuation of these fossil fuel subsidies has been characterized as a ‘triple-lose’ scenario. ^{Reference Bast, Makhijani, Pickard and Whitley35} Not only are they steering funds into fuels that cannot be burned without catastrophic climate effects, they are also diverting investment away from economic renewable energy alternatives such as solar and wind. The continued support for fossil fuels undermines the necessary upgrading of future infrastructure, which not only includes the physical infrastructure, but also the regulatory, political, and economic framework that serves institutions such as the energy market, the utility regulatory system, and the power grid, that were built with government funds. ^{Reference Bast, Makhijani, Pickard and Whitley35}

Fossil fuel supply industrial sectors

Over 100 of the Fortune Global 500 derive their business from the fossil fuel supply chain (Fig. 2). The magnitude of some of their revenues are comparable to the GDPs of mid-sized national economies, such as Ireland, Greece, Israel, and Austria. Although this is a frequent comparison, the company profits may be a better measure to gauge the level of disposable capital these corporations have at hand (Fig. 3). It must also be kept in mind, however, that multi-nationals can benefit from accounting methods to attribute profits to offshore tax havens. An inquiry into US based multinationals has found that Exxonmobil has US$ 51 billion tax-free US dollars in 37 tax havens, and Chevron has US$ 35.7 billion in 12 such non-taxed havens. ^{Reference McIntyre, Phillips and Baxandall69} Indeed, the Fortune 500 companies have more than US$ 2.1 trillion in accumulated profits offshore to avoid US taxes. ^{Reference McIntyre, Phillips and Baxandall69}

Figure 2. Comparison of 11 selected national GDPs with revenues of 14 companies listed in the 2015 Fortune Global 500. ²³² The Fortune Global 500 ranking of companies, starting with largest company by revenues, is shown in parentheses next to company name. The company’s revenue, as a % of home country GDP, is also given.

Figure 3. Annual profits of selected companies from Fortune’s 2015 Global 500 [389] ranking. Fortune Global ranking by revenues indicated in parentheses.

Many of the Fortune Global 500 from the banking sector such as (Goldman Sachs, Deutsche Bank, JP MorganChase, Morgan Stanley etc.) also control fossil fuel supply chain operations.

After the Great Depression, regulations to separate commercial and investment banking, such as the Glass–Steagall Act, were put in place in the US to limit the ability of banks to engage in the monopolistic, anti-competitive structures that were key contributors to the collapse of the stock market in 1929. Over the past decades, many of these laws have been repealed, opening up opportunities for banks. In this increasingly weakened regulatory environment, banks have found that commodities, such as fossil fuels, provide a nexus of profit-making angles. Commodities include oil, gas, coal, uranium, electricity, and CO₂ allowances. Banks have commodity trading subsidiaries, as do the ‘supermajor’ oil companies, pipeline and storage operators, and power generation utilities. In 2008, PriceWaterhouse Coopers published a brochure about commodity trading in the oil and gas, power utility, and mining sectors. ⁷⁰ It is premised on the observation that the ‘hard hat’ business of fossil fuel supply and power generation is increasingly intertwined with the ‘hard ball’ business of financial trading.

Banks and shadow banks

The commodity market revenues of the world's top 10 investment banks peaked at more than $14 billion in 2008. ^{Reference Leff71} As early as 2006, a US Senate committee investigation reports that tens to hundreds of billions of dollars had been poured into commodity markets by hedge funds, private equity funds, large investment institutions, pension funds, and other investment funds over the preceding years. These non-bank financial entities, as well as corporate commodity traders are often referred to as ‘shadow banks’, because they act as credit intermediaries and undertake financial transactions, just as banks do, but without an equal level of regulation, and also without the same kind of safety-net for the global economy. ⁷² As more regulation of financial trading by banks was introduced after 2008, commodity trading by banks decreased and was taken up by the ‘shadow banks’. Also used as intermediaries by mega-banks, shadow banks continue to accumulate assets in shadow banking deals along the oil & gas value chain. In 2014, 52 private equity funds raised $39 billion for investments in the oil and energy sector, 20% higher than the previous year and the highest since 2008. ^{Reference Kumar73} The side-stepping of regulations by forming nonbank entities makes the regulators' task a cat and mouse game.

Not willing to lose a competitive advantage, oil & gas companies and utilities have established banking, investment, and/or commodity trading subsidiaries. By having enormous capital assets, and by being able to access money with the privileges accorded banks, fossil fuel suppliers have been allowed much more favorable circumstances than other companies. A unit of the French power utility, EDF, purchased Lehman Brother's physical trading unit during the financial crisis, and has seen a 60% rise in its revenues since 2008. The trading unit, which has separated its financial performance from its parent group, reported pre-tax profits of almost 500 million euros in 2012. It has since expanded into oil market logistics. A key advantage for corporate trading units is that they, unlike banks, are not banned from trading with their own money. When units of BP and Royal Dutch Shell registered as ‘swap dealers’ ^{Footnote ††} in 2013, they were perceived as being in the same league as the mega-banks in terms of their derivative dealing. Corporate merchants were estimated in 2013 to account for about 40% of the U.S. oil and gas-hedging business, up from almost nothing in just a few years. The multi-billion dollar conglomerate owned by Charles and David Koch, ‘Koch Supply & Trading’, has a unit which claims to have traded the first oil swap over 25 years ago. Now it employs nearly 500 people worldwide, and promotes itself as an alternative to Wall Street. ^{Reference Leff71} In 2013, Dr. Markus Krebber, CFO, described the German utility's trading unit, RWE Supply & Trading, as being the commercial heart of RWE, more or less as a bank's treasury function, through which all the commodity flows go. ⁷⁴

Indeed, trading is present at every stage of the supply chain, and the longer the global supply chain the greater the range of trading options, as Deloitte points out. ⁷⁵ In the conventional electricity supply chain, electricity customers have traditionally been a captive market. Electricity charges have been a reliable revenue stream upon which financial traders float their financial instruments. The unease comes from the idea that they manipulate these streams. Commodity traders may engage in physical operations, in which they buy the commodity at various stages in the supply chain and arrange for transportation and/or storage and/or processing in the following supply chain link, to take advantage of the most lucrative deals. ^{Reference Pirong76} In addition, they hedge most price risks with a variety of derivative and future contract financial instruments. ^{Reference Pirong76} Their scope of business includes contract management, export pre-financing, currency trading, and identifying interest rate differentials.

Profit motives and varieties of insider trading

In one case study of the recent US Senate investigation, Goldman Sachs purchased two open pit coal mines in Columbia with related railroad and port assets in the period 2010–2012. In addition to its longstanding coal trading operations, Goldman has been involved with producing, storing, transporting, selling, and supplying physical coal. When Goldman bought the La Francia and El Hatillo coal mines, they knew the areas around the mines were suffering from severe coal related pollution. The Columbian government had requested the company operating the mines (who continued to operate them under Goldman) to contribute to relocating the local population to a less polluted area. ⁷⁷

However, it was only in Goldman's interest to take on the mines as a merchant banking venture, which means as a short-term investment that must be sold within ten years. This framing created a disincentive for Goldman to pay for long-term infrastructure investments. It is clear they did not supply the resources to adequately address the problems that occurred at those mines between 2010 and 2012, including port access problems, mine and railway closures, a mine blockade by women and children, contractor disputes, labor unrest, aggravated pollution levels, regulatory limits on mining activities, flooding, and the cancellation, postponement, and settlement of coal supply contracts. However, as a Wall Street trader, Goldman can recoup losses by betting, with a ‘short hedge’, that the coal prices and valuation of their affiliate would go negative. That is exactly what they did. The US Senate report states that Goldman offset its own losses through betting that their own mines would lose value, a ‘short coal hedge’, which gained nearly $250 million for themselves. The US Senate report remarks that the insider information they obtained by owning the mine was not public. Therefore this sort of speculation is troubling. ⁷⁷ As of September 2014, the people living in El Hatillo, Columbia had yet to see any mitigation of the pollution, recompensation or relocation. ^{Reference Acevedo78}

This kind of speculation based on insider knowledge of the coal market was noted to have been carried out by other banks, including Morgan Stanley, Credit Suisse, Deutsche Bank, Société Générale, Barclays, Standard Chartered, Macquarie Group, and Bank of America (via Merrill Lynch Commodities). The US Senate report notes several instances of noncompetitive deals giving unfair advantages to banks supplying fossil fuels, including the transport of coal for Merrill Lynch commodities by its own in-house shipping brokerage, or the buying of coal by Deutsche Bank from Latin American suppliers to help specific mining companies to realize their growth plans. ⁷⁷ In other words, these deals are the result of market power and nonpublic information which lock out competition.

Effect on markets and prices

The complexity of the financial instruments and the lack of transparency makes it difficult to discern the effects of financialization of the fossil fuel-to-electricity supply chain on the commodity price. Nevertheless, the degree of market abuse, from before the 2008 crisis through to the present, continues to be investigated and debated. ^{Reference Marengo79,Reference Creti and Nguyen80} Financialization makes the market more interconnected. Trading on the materials and/or conditions from one supply chain link certainly depends on the earlier supply chain links, and, according to the nature of the deal, may also depend on the latter links. In addition, traders who trade in commodity markets often trade in equity markets. A shock in one market may provoke traders to act in another market, creating dependencies between markets. In other words financialization creates dependencies that affect ‘risk sharing’. Intensive commodity trading may be interpreted as being due to market fundamentals (supply and demand) instead of due to other financial motives. Therefore, it affects ‘information discovery’. In both of these ways, speculation is found to affect the prices of commodities. ^{Reference Cheng and Xiong81–Reference Lautier and Raynaud83}

Economic externalities of the ‘resource curse’

The observation that developing countries with an abundance of resources (i.e., mineral, and above all oil, resources) exhibit significantly lower economic growth than comparable countries without similar resources has been called the ‘resource curse’. ^{Reference Sachs and Warner87} The extraction of mineral wealth in a developing country is often correlated with the inability to diversify and grow the economy, authoritarianism, and poor governance coupled with weak institutions, a high probability of engagement in war, and high levels of inequality in the society.

Resource wealth can limit diversification of a nation's economy. It has been observed that high exports from a single sector can cause a currency's value to increase, which renders products from other sectors uncompetitive. This is referred to as the ‘Dutch Disease’ after the experience of the decline of Dutch agriculture and manufacturing after the discovery of oil & gas in the North Sea. ^{Reference Karl88} Economies that rely heavily on single commodity exports are subject to a much higher degree of volatility than diversified economies. Volatility makes planning difficult, and exerts a negative influence on investment, income distribution and poverty alleviation, as social spending is withheld to buffer shocks. ^{Reference Karl88}

Oil production sites are typically enclaves with high capital investment (in extraction infrastructure) within a host nation, but with weak linkages to the broader economy. The sector creates few jobs per unit of capital invested, and the majority of jobs are rarely sourced from the local economy. ^{Reference Karl88} Unlike manufacturing or agriculture which generates smaller revenues but distributes them widely, oil revenues may be viewed as a point-source of revenues for the host nation. ^{Reference Dolan89} Oil revenues generally go directly to the government either as royalties paid by foreign oil companies, or as taxes and profits from state-owned enterprises. These revenues give rulers the option not to tax their own people. More productive economic activities are not necessarily required and therefore not promoted, and the critical link between taxation, representation and accountability may be broken. ^{Reference Karl90}

In a developing country in which oil revenue dominates all other income, the state can become a rentier state, in which society organizes around the influx of point-source revenues, in contrast to revenues from a productive diversified domestic economy. The oil revenue flow is at the same time too large—no work could provide such rents- and too centralized, too disconnected from and unresponsive to the dynamics of the local society. Authoritarian governments have most often shown up in these situations and the diversification through productive activity ‘arising from the ground up’ is actually discouraged. In developed countries, oil revenues tend to benefit incumbent political players. ^{Reference Ross91}

Among the countries which have been identified as having the oil resource curse are: Nigeria, Algeria, Angola, Egypt, Libya, Sudan, Chad, Cameroon, the Republic of Congo, Equatorial Guinea, Venezuela, and Saudi Arabia. ^{Reference Karl90,Reference Li92–Reference Sekumade103} Fig. 5 shows the contribution of oil revenues to the total state revenues for 7 African nations. All of these countries, except Cameroon (with 53% of state revenues from oil & gas and other minerals combined), receive more than half of their state revenues from oil exports. Even after decades of maintaining significant exports, these economies have not become diversified, Furthermore, the agricultural exports, which contributed up to 70% of the Nigerian state revenue in 1960 decreased to 2% by 2009, in an inverse correlation with oil exports. ^{Reference Watkins and Kende-Robb104} Developing countries in Africa, such as Angola, the Central African Republic, Equatorial Guinea, Liberia and Nigeria, have been characterized as exhibiting the resource curse. Botswana is seen as an exception. ^{Reference Chanda105}

Figure 5. Oil revenues as percent of total state revenues in 7 African oil-exporting nations.

One of the largest producers of diamonds in the world, Botswana has had sustained economic growth since 1966. It has carefully managed revenues to avoid debt incurred during boom and bust cycles, and has consistently invested in national development projects. Furthermore, it has a functioning multi-party democracy with the lowest levels of corruption in Africa. Despite the laudable governance of resource revenues, it has not escaped all the symptoms of the resource curse because it's economy is not diversified. Indications of a low diversification are high unemployment (16–40%), attributed to the low job creation in non-mining sectors, that ∼40% of the workforce is used by the government, as well as the persistence of high inequality and severe poverty. ^{Reference Li92,Reference Chanda105}

The average annual growth rate (as % of GDP) between 2000 and 2011 for Equatorial Guinea (17%), Angola (10%), Chad (8.3%), and Nigeria (6.4%) places these nations among the world's top economic performers. Even Cameroon's growth rate over this period was a respectable 3.4%. ^{Reference Watkins and Kende-Robb104} While the GDP reflects the number of transactions that occur within a society, it does not reflect whether or not the economy of that society blossoms or not. The GDP can be a misleading indicator of the wealth of a country. The economic activity of resource extraction typically involves foreign firms, capital and personnel so a significant value of the gains goes to foreigners. ¹⁰⁶

Oil development is often accompanied by stark income inequality. For example, in Angola, oil wealth has transformed some prime sea-view areas in Luanda into enclaves for the elite and for oil executives, with multi-million dollar homes using electricity subsidized with oil revenues, while a short distance away are shanty towns with no electricity and a lack of clean water. State enterprises, such as the Angolan state oil company, and the country's elite are investing revenues overseas. ^{Reference Watkins and Kende-Robb104}

Lack of diversification, particularly reducing the size of the manufacturing and agricultural sectors shuts down economic opportunities for women, which worsens conditions for children. ^{Reference Ross91,Reference Edame, Effiong and Efefiom107,Reference Easterly, Dooley and Frankel108} In 2012, the Nigerian National Bureau of Statistics reported that 60.9% of the population, almost 100 million people, were living in absolute poverty, on less than $1 dollar per day. This figure was up from 54.7% in 2004. ¹⁰⁹ For many children the reality is harsh. In the 7 countries in Fig. 6, on average 11% of children die before their 5th birthday. Of those that remain, roughly a third have stunted growth, and about a quarter of children between the ages 5–14 are working. The average for each of these parameters is shown for all countries with very high, high, medium and low human development indices (HDI), revealing that conditions for children in these 7 African countries are among the worst in the world. ¹¹⁰

Figure 6. Conditions for children in 7 African oil exporting nations. ¹¹⁰

Scale, instability and secrecy

The previous paragraphs have indicated that oil revenues can be massive, and that managing the volatility that accompanies them is a strong test of governance. It has been also observed that the greater the oil wealth, the more secret the budget. These observations have been validated in an empirical analysis of 50 years of data for 170 countries in all regions of the world. ^{Reference Ross91} Large oil revenue flows correlate with corruption. It has been reported that there have been more violations of the US Foreign Corrupt Practices Act by energy companies than by any other kind of business, including weapons trading. ^{Reference Chazan and K. Silverstein111} Indeed, it is interesting to plot the percentage of oil exports (% GDP) next to the corruption ranking of Transparency International as shown in Fig. 7. The orange trendline relates to the corruption ranking of all countries. Interestingly, if the Islamic countries are not included, the corruption ranking trendline (light blue) is nearly parallel to the oil exports trendline (medium blue). This could be rationalized by viewing the imposition of Sharia laws as a heavy enforcement counter-measure to combat otherwise severely corrupting conditions, and improving the overall corruption picture (but not gender inequality).

Figure 7. Countries, with oil exports >5% of GDP ⁸⁵ shown on right axis, and their ranking in Transparency International’s Corruption Perception Index, left axis. The medium blue trendline shows the trend of oil exports. The orange trendline shows the trend in corruption ranking for all countries. Interestingly, by not considering the Islamic countries, the trendline (light blue) of the corruption ranking is nearly parallel to the oil exports.

Transparency International also publishes a ‘Bribe Payers Index’, in which industry sectors are ranked according to their level of corruption. In the most recent results, the oil & gas industry was deemed to be the world's fourth most corrupt industry sector, followed by mining in the fifth place. ¹¹² One example concerns the Société nationale des pétroles congolais (SNPC), the state oil company of the Republic of Congo. Coraf, a Congolese refinery processed 12.2% of the 150,000 barrels per day that SNPC traded in 2013, but never paid the public treasury for the oil. ¹¹³ The corruption in Congo's oil sector does not discourage Swiss traders (Vitol, Glencore, Mercuria, Lynx and Trafigura) who acquired between 27 and 36% of all crude sold by the SNPC from 2011 to 2013, for over $400 million. ¹¹³ In some cases, they earn their large commissions by doing nothing else but transferring the paperwork to an international buyer. At the end, the Congolese people are the losers of oil profits, taxes and interest on the funds that are rightfully theirs. Secrecy in global oil trading is the norm, and the international oil traders clearly collude in and facilitate the corruption. Reports have detailed that the Swiss traders are contributing to the perpetuation of a corrupt system in Nigeria, ¹¹⁴ Angola, ¹¹⁵ and others. ¹¹⁶

The effect of oil revenues on development has impeded economic growth

Although the literature documenting these effects is well substantiated, the authors are unaware of any study that estimates the costs of these economic externalities of oil revenues to these societies. These costs have been indicated to exist in Table 1, but an estimated amount has not been supplied.

Oil & gas supply chain (Table 2)

The oil & gas supply chain is shown in Table 2. Because oil & gas are often extracted from the same wells, their production costs (capital and operations) are typically combined. Therefore, even though oil is much less used as a fuel source for electricity than gas, they are treated together because they are parallel branches in the petroleum industry. Furthermore, the family of technologies that are used to recover both conventional and unconventional petroleum fuels are considered to be under the umbrella of ‘oil & gas’ in this Viewpoint article.

Table 2. Oil & gas fuel supply chain.

Development & production

After location of an oil resource by drilling tests, an oil well must be developed and completed, during which large amounts of gas may vent to the atmosphere. The development of a well is carried out by running a specialized steel pipe down the length of the well until it reaches the oil/gas reservoir. This steel casing is then cemented into place, to support the sides and to prevent other liquids from entering into the well. Completion involves the use of a gun or explosive charge to perforate the casing and to induce the hydrocarbons to flow into the well. In addition to the act of perforating the casing, the heavy drilling liquids sitting at the bottom of the well may also block the flow. These may be ‘lifted’ by injecting gas deep into the well using coiled tubing. When unblocked, the hydrocarbons will begin to flow, often carrying with them water also from the formation, called ‘produced water’. The well must then be ‘stimulated’ either chemically, such as by using acid to create new pores in the formation, or by hydraulic fracturing (‘fracking’). Fracturing of the rock formation occurs with the high pressure injection of specialized fracking fluids, containing particles and a variety of chemicals including surfactants and biocides, and often containing methanol, lead and benzene. With time, the natural pressure of the reservoir will decrease. Then, ‘secondary recovery’ techniques are used to increase the pressure by injecting water, natural gas or other gases into the well. ‘Enhanced recovery’ techniques aim at reducing the viscosity of the oil so that it will flow. These include injecting steam, aqueous, or gaseous fluids with various chemical attributes. As they are extracted, the materials produced from the well are subject to processes to separate the hydrocarbons from the other constituents, and to ready them for transportation. In various stages of completing the well, the wellbore, and surrounding formation must be cleaned out. The solids and fluids from the well are most often stored in open-air pits, while the gases are allowed to escape into the atmosphere, or they are burned off (flared) ^{Reference Stein122} (Fig. 8).

Figure 8. Map of gas flares in Nigeria. ¹³¹

Water, soil and agriculture

PAHs are also released in oil spills such as the Deepwater Horizon accident in the Gulf of Mexico in 2010. Chemicals are injected into the well to stimulate, or unclog, the flow of hydrocarbons, as well as in hydraulic fracturing.

Xylene is widely used as a stimulation fluid for dissolving hydrocarbon-based clogs in oil and gas wells. ^{Reference Zoveidavianpoor, Samsuri and Shadizadeh147}

Various chemicals used in hydraulic fracturing are also contaminating ground water sources in the US. The map in Fig. 9 indicates the 969 cases confirmed by the Pennsylvania Department of Environmental Protection in which water supplies in Pennsylvania have been contaminated or reduced by oil and gas operations, as of 2013. ^{Reference Legere148} A Congressional report ¹⁴⁹ states that 650 different fracking fluid products contained 29 chemicals that were known or possible human carcinogens, regulated under the Safe Drinking Water act for their risks to human health, or listed as hazardous air pollutants under the Clean Air Act. Because the formulations of these products are proprietary, the ingredients are considered to be trade secrets and are closely guarded.

Figure 9. Water supplies in US impacted by oil & gas operations, confirmed by Pennsylvania Department of Environmental Protection in 969 cases. Source: LauraLegere, graphic by WilliamAHuston@gmail.com. ^{Reference Fox and Ziesche237}

This is a problem for diagnosing and treating patients that have been exposed to these fluids, as well as the nurses that treat them. In one report, a patient who had been severely exposed to fluids used in extracting natural gas from shale rock was admitted to an emergency room, complaining of a headache and nausea. He was immediately attended by a nurse, Cathy Behr. Because the chemical smell emanating from this patient was so intense, the emergency room was put on ‘lock-down’ with attending staff suiting up in hazardous material (Hazmat) protection suits. Upon the contact with this patient the nurse developed serious health problems which required intensive care and were diagnosed to be due to chemical poisoning. The identity of the chemicals responsible for the poisoning could not be obtained by the nurse because this was ‘proprietary information’. ^{Reference Rafferty and Limonik150} Acute toxicity is a possible outcome for people who are in direct contact with the chemicals, by those who live close to drill pads, by emergency workers who must deal with spills, and by health professionals who care for the victims. The cases of people harmed by drilling requires further investigation. An obstacle to gathering this information is that people who file lawsuits for compensation most often must agree to confidentiality provisions as part of the settlement. ^{Reference Rafferty and Limonik150}

Ogoniland in southeast Nigeria has been encumbered with accumulating oil pollution for decades. Since the 1950's, before Nigeria's formation as an independent country, oil operations have been carried out by Royal Dutch Shell and other IOC's. Currently Shell's subsidiary, the Shell Petroleum Development Company of Nigeria Limited (SPDC) is the operator of a joint venture (the SPDC JV) between the government-owned Nigerian National Petroleum Corporation—NNPC (55%), SPDC (30%), Total E&P Nigeria Limited (10%) and Nigerian Agip Oil Company (5%). ¹⁵¹ Amnesty International reported on the severe contamination in 2008, and an in-depth 3 years investigation by the United Nations Environmental Program (UNEP) followed in 2011. The three-year investigation found that the land and underground water were heavily contaminated, with some of the contamination still lingering 40 years after the oil was spilled. Community drinking water contained dangerous concentrations of benzene and other pollutants, with benzene concentrations more than 900 times the World Health Organization (WHO) guideline. Contamination of the soil extended more than 5 meters deep in many areas. Most of the spill sites, alleged by the oil firms to have been cleaned, were still highly contaminated. There was also evidence of oil firms dumping contaminated soil in unlined pits. The report documents, among others, health threats from contaminated drinking water and also underlines that the special spread of the pollution may be larger than previously assumed. UNEP called for the establishment of, at minimum, a $1 billion fund for environmental restoration projects, to be financed by the Nigerian government and the oil industry. ¹⁵² No action had been taken by the oil companies, headed by Shell, and the Nigerian government on any of the agreed actions to ameliorate the situation in Nigeria as of August, 2014. ¹⁵³ Additional studies document that high concentrations of carcinogenic PAHs and heavy metals are pervasive in soils as well as in commonly consumed vegetables and tubers grown in the region. ^{Reference Nwaichi, Wegwu and Nwosu154}

The Bodo community, a relatively small part of Ogoniland, had filed a lawsuit against Shell for compensation for oil spills occurring in 2008 and 2009. In January 2015, Shell avoided a High Court Case in the UK by agreeing to an £55 million settlement, in which £35 million is paid to affected individuals and £20 million to the community. Follow-up lawsuits for similar damages to local communities can be expected. ^{Reference Vidal155}

Physical effects of coal supply chain (Table 3)

Coal contributes 29% of the total primary energy supply, and is responsible for 44% of the total (2012) global CO₂ emissions. For comparison, oil and gas contribute 32 and 21% of the primary energy supply, and their combustion generates 35 and 20% to the total CO₂ emissions. ¹²³

Table 3. Coal supply chain.

Coal can be extracted from underground or surface mines. Underground mining is associated with a high frequency of fatal accidents, and chronic lung disease, especially black lung disease, and the emission of methane. Surface mining includes open-pit mining, strip mining and Mountain Top Removal (MTR). MTR involves using explosives to blast and excavation equipment to remove the tops off mountains, to expose coal seams and dump the resulting debris in the valleys and streams below. The debris buries streams and contaminates surface and groundwater sources with carcinogens and heavy metals. The deforestation in combination with the disruption of waterways leads to increased mudslides and flash floods. The blasts themselves can weaken infrastructure and buildings, and strain neighboring communities. A strong link between lung cancer and the PM from coal dust associated with MTR is being observed. Epidemiological evidence shows a correlation of 60,000 lung cancer cases with MTR activities in nearby Appalachian communities. ^{Reference Mathiesen156,Reference Luanpitpong, Chen, Knuckles, Wen, Luo, Ellis, Hendryx and Rojanasakul157}

Coal washing uses polymer chemicals to remove impurities before the coal is transported to power plants, and creates a by-product of water, coal debris and washing chemicals called slurry. Slurry is often stored in open pits or ponds, which have sometimes leaked or failed. Transportation of coal, by rail, truck or ship, can also release coal dust into the air. Post combustion wastes, coal ash, is also stored at dump sites, at which leaching toxic residues have been found to migrate into water supplies. Also known as fly ash, the coal combustion residue is known to contain toxic chemicals and heavy metals known to cause cancers, birth defects, learning disabilities, kidney disease and diabetes. ^{Reference Lockwood, Welker-Hood, Rauch and Gottlieb158,Reference Epstein, Buonocore, Eckerle, Hendryx, Stout, Heinberg, Clapp, May, Reinhart, Ahern, Doshi and Glustrom159}

The respiratory effects of coal combustion products (including NO₂, small PM less than 2.5 micrometres (PM_2.5), ozone, SO₂ and mercury), can exacerbate or cause pulmonary disease (including lung cancer), cardiovascular disease, and nervous system disorders.

Coal extraction in Columbia

Like Goldman Sachs, Glencore, another giant company (see Fig. 2), mines coal in Columbia's Cesar region. The convoluted corporate structuring of, and internal transactions between, Glencore's coal mining subsidiaries in Columbia has facilitated tax evasion, absurdly low royalty payments (only 6% of operational income) to the Columbian government for the coal, as well as unfair conditions and exploitation of laborers (Fig. 10). ¹⁶⁰ “The [Columbian] Comptroller's Office calculates that between 2008 and 2012 Glencore paid an average of only 0.9% income tax on its operational income.” ¹⁶⁰

Figure 10. In 2011–2012, Glencore paid only about 6% of its operational revenue to the Columbian government as royalties for the coal. ¹⁶⁰

The economic effect of the royalties and jobs due to mining has not benefitted Columbia. On the contrary, the regions with coal mining are the most destitute. The municipalities where Glencore conducts its mining operations, La Jagua and El Paso, have an unsatisfied basic necessities index that surpassed 64% in 1993 and grew to a more dire 75% in 2005. ¹⁶⁰ Glencore's labor practices have been found to be not in compliance with Columbia's labor laws. ¹⁶⁰

Despite all the concessions the Columbian government has provided for coal extraction, Glencore has been sanctioned many times by the Columbian environmental authorities for illegal dumping of toxic waste, illegal diversion and/or obstruction of water resources (including aquifers), illegal forest and plant cover removal over extended areas and coal spills, among others. Water resources used for human consumption and agricultural use have been contaminated with toxic mine tailing waste and associated chemicals, leaving high levels of arsenic, antimony, manganese, lead and other metals, and resulting in permanent ecosystem impairment and loss. The open-pit mining causes airborne particulate air pollution which affects vegetation and soils. Because of air pollution and environmental degradation, Glencore must contribute, along with Goldman Sachs and Drummond, to relocating the population of several towns near the mines it operates.

As of 2015, Glencore had carried on mining activities there for almost 20 years, during a 40 years armed conflict. To guarantee the protection and security of the mining infrastructure in the municipalities of El Jagua de Ibirico and Becerril, Glencore undertook secret cooperation agreements with the Columbian Ministry of Defense, involving contributions by the company worth more than 180,000 dollars annually. By virtue of these agreements, a military unit, the Special Energy and Transport Battalion No. 2, established a military base within [Glencore's] Calenturitas mine. From 2007 to the present, there have been at least four murder investigations against a total of 20 of the unit's personnel. Two of the investigations have concluded in a conviction of charges of crimes against humanity. ¹⁶⁰ The third murder case did not reach trial because the time for the statute of limitations elapsed, and the fourth is still under investigation.

Like the unfortunate coal mining regions in Columbia, six coal mining counties of Kentucky, in the Appalachian region of the US, are ranked among the ten worst places to live in the US. ^{Reference Flippen161,162} The median household income in Clay County is barely above the poverty line, at $22,296, about half the median income in the rest of the country. Only 7.4 percent of the population has a bachelor's degree, while 12.7 percent is unemployed, and 11.7 percent is disabled. ¹⁶² Coal has been the primary industry in Clay County for decades. The coal production has been in decline since the 1990's, but the economy has not yet recovered. Coal mining regions across Appalachia have elevated mortality rates. ^{Reference Hendryx and Ahern163}

Although Appalachia cannot suffer from currency appreciation due to coal exports, it is often described as presenting the resource curse, in that its resource abundance negatively impacts its economic growth. ^{Reference Douglas and Walker164} World Bank economists recently addressed this question and showed that inequality in the distribution of resource revenues is enough to generate stagnation (i.e., the Dutch disease) in the economy even for a country with an initially higher manufacturing productivity. ^{Reference Chisik, Onder and Battaile165} A more equal distribution of revenues, as opposed to the point-source nature of fossil resource revenues, would stimulate diversification of the local economy and apparently avert the Dutch Disease.

Physical effects of uranium supply chain (Table 4)

Uranium mining environmental impact

In conventional mining of underground or open pit mines the bulk rock containing the ore is extracted, and then ‘milled’, or crushed, and then chemically leached to concentrate the uranium fraction into a dry yellow powder of U₃O₈, called ‘yellowcake’. Because the mining and milling of uranium ore seeks to isolate only 0.01% of the rock, 99.9% of the extracted rock is rejected after processing. The amount of ‘tailings’, or the crushed rock that is rejected, is significant, and is roughly 80% as radioactive as the sought-after ore. In contrast, in situ leaching techniques inject water, mixed with oxygen and sodium bicarbonate, down the wells to pierce the ore formation and dissolve the uranium in the groundwater. Pumped to the surface, a processing plant separates the uranium from the sludge, or ‘tailings’ generated with this process. In situ leaching accounts for 80% of the uranium ore produced in the US at present because it is more cost effective and facilitates extraction from lower-grade ore reserves. However, evidence is mounting that these techniques result in degraded groundwater resources, which is particularly devastating in the arid regions where uranium is found. ^{Reference Koplow38}

Table 4. Uranium supply chain.

Subsequent processing converts U₃O₈ into uranium hexafluoride (UF₆), which is then enriched to concentrate (from 0.72% to the roughly 3.5%) the active isotope (U-235) of uranium. The enriched UF₆ is then solidified and processed into uranium oxide (UO₂), which can be used to manufacture nuclear fuel rods for power plants.

The bill for the clean-up of uranium mining is passed to the taxpayer. The cost of cleaning up the uranium mining sites is estimated to be about the market value of the uranium extracted. ^{Reference Koplow38} In the southeastern US, uranium extraction in Arizona, New Mexico, and Utah has left severely polluted sites still needing remediation, that the US Environmental Protection Agency has designated as ‘Superfund sites’. ¹⁶⁶ On the Navajo lands alone, a legacy of uranium contamination remains from more than 500 abandoned uranium mines, homes built with contaminated mine waste rock, and contaminated water wells.

Uranium

More than half the world's uranium production comes from just 10 mines located in Canada, Australia, Niger, Kazakhstan, Russia and Namibia, which are controlled by eight corporate entities: Cameco, Areva, BHP Billiton, Rio Tinto (with daughter Energy Resources of Australia), Kazatomprom, Rosatom and Paladin Energy. ^167,233 As of 2008, a small club of 14 corporations controlled 90% of the uranium supply. ¹⁶⁸

1984 and 1985 were the years that saw the highest number (33 in both years) of nuclear plant start-ups, just before the Chernobyl accident. Then, the number of start-ups declined sharply until 1990, the first year that the number of shutdowns surpassed the number of start-ups. Over the decade, 1991–2000, however, there were more start-ups (52) than shut-downs (30) overall. Nuclear contributed its highest share ever (i.e., 17.6%) to the global electricity generation in 1996. In the period, 2001–2014, 48 new nuclear reactors worldwide were connected, and 58 reactors were shut down. 11% of the reactors (47) currently listed as operating (435) are actually off the grid, experiencing a long-term outage (i.e., off-line ≥ 1.5 years) with minimal prospects of being restarted. As of 2014, of the 67 reactors listed as being under construction, 9 have been under construction for between 12 and 20 years, and 49 have already experienced significant (several months to several years) construction delays. Only 18 were either started within the past 3 years, or have not yet reached the project start-up date. Over 70% of the new reactors (48) are in 4 countries: China, Russia, India and S. Korea. ^{Reference Schneider and Froggatt169}

Nuclear power generation reached its peak in 2006, when there was ∼360 GW installed capacity producing 2660 TWh of electrical energy, even though the number of operating units had already been in decline since 2002 (when 437 reactors were operating). The price shot up in 2007 (Fig. 11) apparently due to concerns about supply meeting demand, in conjunction with a belief that nuclear power would rise as a noncarbon emitting power source, a notion that was certainly more credible then than it is today. In 2010, large nuclear power developers, e.g. Areva, were again actively promoting the eventuality of a nuclear renaissance. ^{Reference Grancea and L. Grancea170} In both 2007 and 2010, the resurgence of nuclear power did not happen. ^{Reference Fernando171} In the past few years, some have promoted that nuclear fuel and technology will become more relevant to the global energy supply. ^{Reference Kidd172} In Europe, the test case for the ‘mini’ nuclear renaissance is the Hinkley Point C plant in the UK which has been in the planning since 1998, but due to the many troublesome aspects of the technology, it is still not certain to go ahead. It would deliver the most expensive electricity on the system, requiring subsidies of roughly £17.6 billion. ^{Reference Schneider and Froggatt169} The necessary funding for the final stages needs to be extended by EDF, which is currently in the red. ¹⁷³

Figure 11. Uranium price history from 2005 to 2015. ²³⁸

The shut-downs in the nuclear industry; however, have allowed for uranium fuel to be stockpiled. With nuclear power now only generating 10.3% of the global electricity generation, and with analysis showing that uranium supply will be in surplus until at least 2021, it is hard to believe that any change in the price will not be due to pure speculation. ^{Reference Koven174} Between 1995 and 2005, the price of uranium never topped $20 per pound, not least because uranium fuel is highly subsidized, and the subsequent movements in the price were apparently speculative bubbles. Uranium prices are, at the end of the day, a very small cost factor in the overall economics of nuclear plants, which are being roundly outcompeted in a host of more important criteria such as overall cost, flexibility, and build times, as demonstrated by the Hinkley Point C project.

Coal

Research that delved into more than half of the coal development investments between 2005 and 2014 (i.e., the funding of 52% of the coal mining industry and 53% of the coal power industry projects) identified and inventoried the involvement of banks in facilitating funding. Only 20 commercial banks were responsible for channeling 273 billion euros (367 billion dollars) into coal projects, or 70% of the funding examined in the study (which covered investments totaling $500 billion). Since this study only examined half of the overall funding, this suggests that the total expenditure during these nine years was on the order $1 trillion, and it does not include the huge investments in coal transportation that accompany coal mining expansion projects around the world. ¹⁷⁵ Financing of coal projects has increased by 360% since 2005, the year that the Kyoto Protocol entered into force. 2013 was a record year for coal finance, with commercial banks providing more than $88 billion to the main 65 coal companies. ¹⁷⁵ In 2014, global investment for coal held steady at US$ 141 billion, as compared to $145 billion in 2013. ¹⁷⁶ Recent announcements by JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley, however, that they are shifting investments away from coal may confirm the 2015 Paris Agreement as a turning point. ^{Reference Corkery177}

The price of coal has decreased by 40% since 2011, reflecting a slowing in demand (due to competition from other energy sources and energy efficiency, and regulations to limit air pollution). China has accounted for over four-fifths of global coal consumption growth, half of which is thermal coal used predominantly to fuel China's coal-fired fleet of electrical power generating stations. ^{Reference Sussams178} As a response to the growing coal pollution in major Chinese cities, the Chinese government has decided to limit coal use. China's Premier Li Keqiang said, in a statement to parliament, that the goal is to limit the growth in coal consumption in key areas that are affected by severe smog, regions where conserving energy is difficult, and in industries with overcapacity, and replace coal with alternative energy sources. ^{Reference Green179} Chinese imports of seaborne coal dropped 31% in the first 8 months of 2015, as compared to the previous year. ¹⁸⁰

Despite the slack in demand, the supply of coal continues to grow as projects, that were undertaken during the last few years when coal prices were high, begin to produce. ¹⁸¹ A survey of 83 coal companies shows that they have increased their combined net fixed assets by $214 billion since 1990. ¹⁸¹ Miners from Colombia to Australia maintained output as prices fell for a fourth year in 2014. Despite continued losses, Peabody Energy Corporation, one of the world's largest coal producers, increased extraction from the US Powder River Basin mines, and is expected to soon file for bankruptcy, following other large coal companies such as Arch Coal, Alpha Natural Resources, and the Patriot Coal Corporation. ^{Reference Goldernberg182,Reference Corkery183} Despite the bankruptcies, the stockpiles of coal held by US utilities (∼100 million tons) threatens to depress prices for years. ^{Reference Parker184}

The strategy has been for the main mining industries, those with highest volumes and lowest production costs, to keep producing and push more expensive producers out of the market. ^{Reference Vitelli, Sharples and Parker185} Investors have watched the valuation of coal investments drop by over 50% between August 2009 and August 2014. Figure 12 shows that the value of coal, as shown by the Bloomberg Global Coal Index, which tracks the share prices of 32 large coal producers, is not following two other indices, namely the MSCI World Energy Index, which is heavily weighted toward oil and gas companies, or the more general Morgan Stanley Capital Index (MSCI) World Index. ¹⁸¹ Investors would benefit from a reduction in supply and a divestment of capital assets of over-extended companies. ^{Reference Vitelli, Sharples and Parker185} In both the coal and oil & gas sectors, market mechanisms are underway to further concentrate the industry: the price wars are knocking out projects requiring ‘artificially’ high minimum prices to be viable. Players that are more diversified and/or have deeper pockets will survive.

Figure 12. Bloomberg Global Coal Index does not follow the MSCI World Energy Index or the more general MSCI World Index, but rather declines significantly over the period between August 2009 to August 2014. ¹⁸¹

Oil & gas

How much oil and gas is there?

Of the total 47,500 oil fields on record in 2006, only 507 (1%) were giant fields, and were responsible for 45% of all crude oil. ^{Reference Klare186} Historically, the world's oil production has been dominated by 10 giant (conventional) oilfields, which produced 20% of the crude oil in 2007: six in the Middle East, two in Russia, one in Mexico, and the last in Azerbaijan. ¹⁸⁷ Despite an increasing demand for oil, conventional production remained flat since 2005. ^{Reference Mearns188–Reference Aleklett190} Consistent with the fuel companies' financial driver to replace reserves, a growing energy demand has been projected by a variety of institutional and industry forecasts. For example, the IEA has asserted that the energy supply will need to grow by ∼40% by 2040 ⁶⁷ (more recently, estimates of demand growth have been revised downward to reflect the halving of demand growth between a 5-year high in the 3rd quarter of 2015 to a 1-year low in the 4th quarter 2015 ¹⁹¹ ).

Even though they are more expensive to recover because they are in the most remote and uninhabitable places on earth, unconventional oil & gas sources, such as tight oil, shale gas, oil sands, natural gas liquids, and deep-water or Artic oil & gas reserves, were seen as the answer to a falling conventional supply. The high price of oil (up until mid-2014) made these efforts appear to look like good investments.

BP's chief of exploration and production proudly stated their technical ability to extract and develop petroleum reserves in the most hostile environments on earth. ^{Footnote ‡‡} To put this in perspective, a conventional oil rig at the Azeri–Chirag–Guneshli (ACG) oilfield in Azerbaijan is likened to a space station. The seven thousand tons of components and machines, built all over the world, needed for one oil rig are assembled near Baku, before they are launched into their deepwater positions with the aid of satellites. ^{Footnote §§} The overlap between the technology used for oil rigs and space stations is not just a metaphor, it is also the focus of a proposed recent research agenda which seeks to apply space technology strategies to the maintenance of oil & gas assets in remote or extreme places. ^{Reference Perrons and Richards192}

The idea to increase reserves relies on setting up these massive processing stations to produce oil from the depths of the sea and at the polar icecap, where the US Geological estimates that 20% of the world's undiscovered oil lies. ¹⁹³ These extreme conditions require additional engineering designs to keep the equipment operating at ever greater pressures and lower temperatures. Ultra-deep wells, drilled in water at least 1.5 km deep, and often into several more kilometers of rock to the reservoir below, accounted for around half of all the world's new discoveries in the first half of 2012. ^{Reference Callus and Hays194} Unconventional oil & gas resources present other challenges. Hydraulic fracturing (‘fracking’) of tight oil and gas, despite operating in inhabited areas, also requires more wells and extensive production operations than conventional oil & gas resources, including greater energy and water consumption, closer well spacing and service traffic. ¹⁹⁵

Vast amounts were spent on finding new oil and gas in 2014 when the price of oil was still high. Compiled by the US Energy Information Agency (EIA) in Fig. 13, the upstream expenditures grew on average by 11% per year, or a total of 450% between 2000 and 2012. ¹⁹⁶ Even with the increased funding, production did not increase but rather decreased by 6% between 2006 and 2012 ^{Reference Weijermars, Clint and Pyle197} (Fig. 15). Barclays estimated global exploration and production (E&P) spending would reach a new record of $723 billion in 2014, up 6.1% from $682 billion in 2013. ^{Reference Addison239} Up to 2000, major oil companies could spend half their capital on upstream activities and be able to replace the reserves depleted by production. In 2014, they were spending ∼80% of their capital on upstream activities. ^{Reference Weijermars, Clint and Pyle197} Footnote *** It looked like the rising cost of hydrocarbon extraction would be able to be supported by oil prices above $100/barrel, but it was already acknowledged that replacing reserves would be challenging. ^{Reference Weijermars, Clint and Pyle197} An oil price of at least $60/barrel would be enough to double the estimation of US petroleum reserves (by including now economic unconventional sources). $90/barrel would triple them. ^{Reference Slaughter198}

Figure 13. Exploration and production expenditure of 42 oil & gas companies. ¹⁹⁶

Figure 14. Brent crude oil price ($/bbl) from 2000 to January 2016. Source data: EIA. ²³⁶

Figure 15. Rig count for US unconventional oil & gas fell by 39% by the end of Feb. 2015. By March, 2016 the number of rigs had decreased by 75% since the peak in Sept. 2014. ⁵²

Demand for oil has slowed due to global economic weakness, tougher fuel economy regulations, more installations of renewable energy, and increasing energy efficiency in general. Unconventional production, especially hydraulic fracking of tight oil, doubled US production between 2010 and 2013. This was the largest supply, globally, of new petroleum liquids since 2008, and it led to an oversupply in the market. ^{Reference Slaughter198,Reference Doshi and Corrigan199} The success in the US production led to the idea that the tight oil resources around the world should be developed by US companies. ^{Reference Webster200} Analysts found that prices between $60–$100/barrel would allow development of tight oil resources in Russia, Argentina, China, North Africa, Mexico, Australia, Columbia, Algeria and Brazil. ^{Reference Webster200} American global energy experts suggested that America preempt OPEC's dominance over the oil market. ^{Reference Nocera201 Footnote †††} Then they asked OPEC to cut production to keep prices up. OPEC decided in mid-2014 against shoring up prices artificially, with the motive of maintaining market share. This decision caused oil prices to fall by about 50% in the second half of 2014, after a four year period of stability at about $105/barrel ^{Reference Bank202} (Fig. 14). In the context of the developing issue of climate change as well as the growing fossil fuel divestment movement, analysts in 2014 pointed out that the Saudi decision may have even taken into consideration the contingency that fossil fuel reserves may eventually be rationed. ^{Reference Prudent203}

Gas prices are also affected by the downturn in oil prices. Asian gas contracts are directly linked to oil prices. In the U.S. and European markets, there is an indirect relationship between oil and gas prices. ^{Footnote ‡‡‡, Reference Martén and Jiménez234}

At less than $60/barrel, unconventional sources of oil and gas are not competitive. The Brent crude oil price has mostly been below $60/bbl since December 2014, with the resulting collapse of many tight oil development projects. ^{204,Reference Tully205} Unlike conventional wells that tap relatively large petroleum reserves that produce for 20 years, horizontal wells into tight oil reserves generate far less and are, on average, largely depleted within three years. ²⁰⁶ The EIA suggests that the average depletion rate for a tight oil well is 50% over three years, but other sources suggest that the depletion rates, over the first year, are between 65 and 90% for both tight oil and shale gas. ^{Reference Sandrea207} Either way, shale oil producers need to constantly drill new holes. ^{Reference Cunningham208} The North America rig count declined by 39% in the first months of 2015. As of March, 2016, the number of total producing rigs has decreased by 75% since a peak at the end of Sept. 2014 ^{Reference Hughes209–215} (Fig. 15).

The Standard & Poor's index of 80 oil and gas exploration companies peaked in June, 2014, and has since then lost 2/3rd of its value. It has been the most significant change in valuation since the crisis in 2008–9 (Fig. 16). The number of rigs in the Gulf of Mexico declined by 75% between the middle of 2014 and March, 2016, consistent with the estimation that a price of $80/bbl (WTI) is needed to ensure the viability of most deepwater developments. ^{Reference Adeosun216,217} Although there are benefits to consumer countries, and losses to producer countries with the current low fuel prices, it is not expected to be a long-term condition. Volatility is expected to be the ‘new normal’. ^{218,Reference Klevnäs, Stern and Frejova219}

Figure 16. The valuation of 80 oil and gas exploration companies by Standard & Poor, 2016. ²³⁵

Dangerous market conditions will allow only the most endowed corporations to survive, putting pressure to consolidate on an already concentrated industry. The still-producing conventional fields continue to be economic at lower prices. Saudi Arabia will lose some income from the reduction in prices, but it is only a fraction (17%) of the revenue it will receive (Fig. 17). Furthermore, it has the world's third largest sovereign wealth fund which can insulate it from short term price instabilities. ²²⁰ According to the official documents, Saudi Arabia's returns are significantly lower than other funds (up to 10%), i.e., no more than 2–3%, because much of the money was invested in US Treasury Bonds. One might wonder why Saudi Arabia would not arrange higher returns, as was done by US university endowments, when they shifted their investments away from the US Treasury bonds decades ago. ^{Reference Piketty223} Saudi Arabia and the United States have maintained close security ties since the 1940's. ^{Reference Blanchard222} Speculation has suggested that economic, including military trade, arrangements have become entangled with diplomatic relations. ^{Reference Piketty223}

Figure 17. EIA illustration of economic security of Saudi Arabia. ²³¹