Last year I published a report with the (justifiably) bombastic title, “$500 per barrel: could oil price rise tenfold?” One of my central claims was that producing oil requires investment of real capital including materials, equipment and highly skilled labor, and that, “as more and more resources are required to generate the same amount of liquid fuels, energy production is becoming ever more expensive to society in real terms.” Thus, as it becomes more expensive in real terms (as the deteriorating EROEI figures indicate), the fact that energy has recently become cheaper in nominal (dollar) terms can only be a temporary abberation. EROEI stands for energy return on energy invested; in the early 1900s, we obtained 100 barrels euqivalent of oil per barrel invested (EROEI of 100 to 1); today we are at about 15 to 1 globally and at 11 to 1 in the USA.

Unfortunately, the reality on the ground appears to be catching up. Last week CNBC reported that as higher oil prices have ushered in a revival of drilling in the Permian basin, the costs of drilling have risen at an alarming rate. Over the last two months, drilling costs per rig have jumped by over 15% (and up to 22% in some cases) while the costs of hydraulic fracking have gone up by more than 45%! At the same time, a shortage of equipment and qualified labor has become acute with drilling crews being fully booked through the summer. It is difficult to see how these conditions could be conducive to low energy prices for long.

Recently, the International Energy Agency asserted that meeting world’s energy needs would require investing $48 trillion through 2035. That makes it sound like a small problem to solve, but framing the problem in terms of dollars is deceptive. The idea that central banks can create capital as needed has distorted our thinking for decades and humanity’s collision with the concept of limited, nonrenewable resources could prove to be a rude awakening.

Alex Krainer is an author and hedge fund manager based in Monaco. Recently he has published the book “Mastering Uncertainty in Commodities Trading“.