4 The Role of Oil and Gas in the Economic Development of the Global Economy

This chapter is concerned with the role of oil and gas in the economic development of the global economy. Its focus is very much on the context in which established and newer developing-country oil and gas producers must frame their policies in order to optimize the benefits of producing such resources. It begins by outlining a brief history of the issue over the last twenty-five years. It considers oil and gas as factor inputs, their role in global trade, the role of oil prices in the macroeconomy and the impact of the geopolitics of oil and gas over the same period. The chapter then considers various conventional views of the future of oil and gas in the primary energy mix, trying to explain why there is such a tendency to consensus in the different forecasts. Finally, it seeks to challenge the various drivers behind these conventional views of the future with an emphasis on why they may prove to be very different from what is expected and how this may change the context in which producers must frame their policy responses. The principal purpose is to explain recent developments in energy, particularly those that have led to lower oil prices since 2014, and to argue that lower prices may well be the norm going forward. For low- and middle-income countries that were anticipating significant revenues from oil and gas when expected prices were much higher, this will require a number of adjustments. In particular, they will have to lower their spending levels and seek to raise alternative sources of revenue. They must also make plans to manage the macroeconomic consequences of lower revenues. Above all they must give (even more) serious consideration to policies to try and diversify their economies away from dependence on hydrocarbon revenues and away from expectations of dependence.

This section considers some of the background context for established and newer developing-country producers, leading to a picture which can then be developed as they face a more uncertain future in terms of energy prices.

Ever since the Industrial Revolution, energy has always been a key factor of production (Landes 1969). Recent history has proved no exception. The pattern of primary commercial energy consumption¹ since 1965 is presented in Figure 4.1.

Since the start of this century, what is clear is that energy consumption outside of the OECD has grown very strongly while in the OECD it effectively peaked in 2004. As explained in Appendix 1 (Stevens, 2016a), this is because of the lagged relationship between prices and energy consumption following the oil shocks of the 1970s and represents an important part of the story, especially when the future is considered in Section 4.4.

As to fuel mix, Figure 4.2 illustrates the patterns since 1965. As can be seen, oil has dominated the mix in this period as a result of its innate advantages. Thus, because it is liquid and flows in three-dimensional space it attracts very large economies of scale.² It also has much higher energy content than other fuels.³

The effect of the oil price shocks of the 1970s was to push oil out from the static sectors (such as power generation), replaced initially by coal and gas. However, it retained its favoured position in the transport sector. Until recently, gas remained a constrained fuel limited by its very high transportation costs.⁴ Also its use in the power sector was prescribed in the United States and the European Union by regulation between 1975 and 1990.⁵ In emerging-market economies, its domestic development by the (foreign) companies that had discovered the gas was also constrained in the face of non-convertible currencies. Thus the gas could only earn revenue that the foreign company could not remit back to its shareholders.

However, despite the growing use of commercial energy, the world faced very considerable fuel poverty. Many remain without access to electricity and to modern cooking fuels. It is interesting to observe that the Millennium Development Goals did not relate at all to energy. However, the more recent Sustainable Development Goals explicitly refer to energy.⁶ As will be discussed, this will carry important implications for the future of oil and gas in the development process not least because the price of solar electricity is falling far more rapidly than many expected.

Oil and gas are major internationally traded commodities. Because of economies of scale, transporting oil and oil products is extremely easy and extremely cheap. This goes a long way to explain why oil is a truly internationally traded commodity with a unified market while gas remains traded in regional markets.⁷ Gas suffers from what has become known as ‘the tyranny of distance’. Thus a much smaller proportion of gas consumption is traded internationally. For many countries their oil and gas trade makes a significant contribution (both positive and negative) to the current account in the balance of payments. In particular, a number of oil exporters are highly dependent upon oil exports for their foreign exchange.

Ever since the oil price shocks of the 1970s, attention has been paid to the relationship between oil prices and global GDP growth. Casual observation suggests that the changes in oil prices in the 1970s and 1980s did affect economic growth in the OECD. There are good economic grounds to expect this negative relationship. Higher oil prices shifted income from the OECD to the OPEC countries. The OECD countries had a much higher propensity to consume compared to the OPEC countries, which in this period lacked the institutional capacity to spend fully their windfall revenues. A large proportion of this windfall was simply left in Western banks. Thus global aggregate demand fell, generating economic recession.⁸

The higher prices seen from 2004 to 2014 in all natural resources have brought the issue of ‘resource curse’ back into the policy debate (Stevens et al. 2015).⁹ Linked to the debate on resource curse has also been a revived interest in economic diversification in those countries highly dependent upon oil and gas revenues. The key point here is that oil revenue is not income. Rather, it simply represents the re-shuffling of the nation’s portfolio of assets. Figure 4.3¹⁰ typifies the production profile of an oil producer.

In the initial stages, production provides financial resources, which should be used to promote economic development. Production then reaches a plateau.¹¹ In this transition phase, it is crucial that the financial resources released by producing the oil are used to create an alternative income-producing asset. Eventually, production will decline as a result of natural depletion or because of a lack of demand. For export earnings, this process is accelerated as domestic consumption rises. In this stage—‘dependence unsustainable’ in Figure 4.3—it is no longer feasible to rely on oil revenues to support the rest of the economy. Therefore, oil-dominated economies should aim, from the very early stage of production, to diversify away from dependence on oil revenues. The success or otherwise of this strategy can be measured by the non-hydrocarbon fiscal deficit.¹²

Geopolitics and oil are inextricably linked. There are two oil markets—the wet barrel market where real barrels of crude oil are bought and sold, and the paper barrel market where promises (written on paper) to deliver or take delivery of oil are exchanged. To understand the wet barrel needs ‘Economics 101’. To understand the paper barrel market needs ‘Psychology 101’. The relationship between the two markets is complex and controversial but comes down to issues of perception. Those negotiating contracts in the wet barrel market will look to the paper barrel market to give an indication of what prices might be. Those in the paper barrel market deciding where to invest will look to the wet barrel market for signs of surplus or shortage.

There are two problems here that aggravate oil price volatility. First, many of those playing in the paper markets do not really understand the oil industry and frequently misread the state of the wet barrel market, often assuming shortages when there are none. While this may sound improbable, a similar situation exists in foreign exchange markets, known as ‘scapegoat theory’ (Bacchetta and Van Wincoop 2004). Thus, economists trying to predict exchange rates using the usual economic metrics will often get it wrong because those setting the rate—that is, the traders—look at a totally different set of metrics. The second source of price volatility is that perceptions can change in the blink of an eye and with them so can prices!

In this context, it is easy to see the relevance of geopolitics in terms of recent price history. Any loss of oil supplies as a result of geopolitical events, such as a war, has affected physical supply in the wet barrel market. Wars and rumours of war have also affected expectations in the paper barrel market. Politics have clearly affected government policy (Stevens et al. 2013). Security-of-supply concerns drive the energy policies of energy-importing nations, which in turn will impact energy consumption levels and the energy mix. Equally, security-of-demand concerns drive the depletion policies of producer governments and the rise (or fall) of resource nationalism. This century there has been a significant rise in resource nationalism that has coincided with the upturn of the commodity super-cycle.

As indicated at the start of the chapter, the future of energy markets will frame the need for the established and newer developing-country producers to develop their own policies against a background of highly uncertain energy prices. Thus it is important to begin by considering what the conventional views of this future suggest as the most likely path. Figures 4.4 and 4.5 give a flavour of some of the views of future energy demand from a variety of sources.

The first point to note is that there is a fairly strong consensus on the direction of travel. Virtually all of the growth in primary energy demand is thought likely to occur in the non-OECD countries and fossil fuels are thought likely to continue to dominate supply.

It is interesting to speculate why there is such consensus. One explanation is that the forecasters have models (quantitative and qualitative) based upon similar drivers. How much certainty there is over these drivers will be discussed in Sections 4.3 and 4.4. There are, however, other more controversial explanations. First there is safety in consensus. Thus, if your forecast is wrong, so is everyone else’s forecast. Second, there is also a real problem of forecasting discontinuities. Forecasting trends based upon business as usual is fairly straightforward. Forecasting bends in trends can also be done with some imaginative thinking. However, forecasting major discontinuities is next to impossible. Even a brief acquaintance with the history of energy markets since the 1970s shows it has been littered with major discontinuities driven by economics, technology, and pure accident. There were the three oil price shocks of 1973, 1979, and 1986. There have been various accidents ranging from Three Mile Island to Chernobyl to Fukushima for nuclear and the Macondo spill for oil. There has been the shale technology revolution that has had such a dramatic impact on oil supplies. The list could go on.

Finally, there is the problem of political and vested interests behind the mutually supporting consensus of most forecasts. The IEA, for example, was created to persuade oil-importing OECD countries to reduce dependence on imported oil.¹³ Projecting shortages in the future might be seen as a good method to encourage consumer governments to take steps to reduce dependence. Equally, the oil companies have a vested interest in persuading their shareholders that oil demand will continue to increase and that better times in the market lie just ahead (Stevens 2016b).

Such consensus views of a business-as-usual future are in danger of giving false expectations to oil and gas producers. Sections 4.3 and 4.4 consider why these conventional views of the future might be wrong, thereby forcing the established and newer developing-country producers to consider carefully their future policy options. Section 4.3 looks at economic and technological concerns and Section 4.4 considers geopolitical threats to such futures.

As implied in Section 4.2, the consensus associated with forecasts of energy supply and demand in part arises because the forecasters tend to take similar views of the drivers behind the forecasts. However, as suggested, the history of energy markets has been characterized by frequent deviations of the drivers from the expected path. This section considers what factors might cause the future drivers underlying the forecasts to be different from today’s expectations.

Invention and innovation are embedded in the forecasts.¹⁴ There are three particular areas where change could impact how the future unfolds: carbon capture and storage (CCS); the development of batteries; and the spread of shale technology.

CCS is a well-established technology. However, the costs and problems with its adoption are considerable. First capturing the carbon adds significantly to the cost of power generation. Also there are serious problems in capturing from small-scale emitters. Storage faces many problems, not least ensuring that once the carbon is stored there are no leakages. For example, a major problem in the United States is that property rights to the sub-soil make it unclear where responsibility would lie for maintaining the storage once the CO₂ has been injected. Solving these problems would mean that the very large reserves of hydrocarbons could be burnt without aggravating climate change.

Improvement in battery technology would greatly assist in the key problem with renewables: namely that of intermittency. Technological developments could make batteries smaller, easier to charge, and cheaper. A good example of possible change relates to electric vehicles. A large stock of electric vehicles could provide considerable storage. Modern metering technology means that electric vehicles could supply power to the grid and be paid for it.¹⁵ Furthermore, if roads could be built with induction strips, electric vehicles could charge or discharge while travelling.¹⁶

Offering a ‘longitude prize’ might be one way to generate changes to the technology for CCS and batteries. At the start of the eighteenth century, the great scientific question of the age was how to determine where you were at sea. Latitude could be measured by assessing the angle of the sun but estimating longitude required an accurate timepiece to determine the time at the port of origin. In 1714, the British government offered a very significant prize for whoever came up with such a clock. It was eventually awarded in 1793 (Sobel 2011). The COP21 meeting in Paris in December 2015 actually created the institutions that could well make a similar prize feasible in the two areas of CCS and batteries. Thus there was the Mission Innovation group of twenty governments, which was a global initiative to accelerate clean-energy innovation, and the Breakthrough Energy Coalition, which was a global group of twenty-eight high-net-worth investors from ten countries committed to the initiatives of Mission Innovation.

The shale technology revolution has the capability to transform the prospects for oil and gas supply. In the United States it has led already to a dramatic increase in oil supply and an equally impressive increase in domestic supply of gas.¹⁷ The revolution consisted of the development of horizontal drilling and hydraulic fracturing.¹⁸ A key question is how far this technology can be used outside of the United States to produce similarly dramatic increases in supply. Certainly, there are ample technically recoverable resources of shale hydrocarbons globally. However, there are many barriers to converting these resources into producing capacity. Table 4.1 outlines the conditions present in the United States that effectively led to the shale technology revolution. By contrast, it also shows that these conditions are for the most part not present in the United Kingdom and a similar story is true for most other parts of the world.

Of course, the shale technology is constantly changing and improving. Many of the characteristics that are not currently present outside of the United States could be made available as a result of improved technology and institutional changes.¹⁹ For example, a major barrier to using hydraulic fracturing in Europe is concern over the impact on water supplies and the danger of contamination of aquifers. Currently, experiments are underway to use sonic waves rather than water and chemicals to frack the rocks and if successful this alternative technology might allay these fears.

Changes in any of these and other technologies could obviously seriously impact the consensus views of the future embodied in the forecast described in Section 4.2.

Another driver of future energy demand is income. The GDP growth figures underlying the energy demand growth in the forecasts are fairly consistent and generally quite conservative.

It is perfectly possible to imagine a GDP outcome that is very different. Three discontinuities loom large. The first would be another global financial crisis along the lines that followed the collapse of Lehman Brothers in 2008. The second could be a dramatic implosion of the Chinese economy as the political system collapses, faced with serious internal conflict as the economy stagnates and political reform fails to keep pace with economic liberalization. The third might involve ‘Trumpian Uncertainty’. This refers to the fact that President Trump, to put it kindly, is extremely unpredictable. It is not clear when a ‘tweet’ is just a ‘tweet’ or when it is policy. It is perfectly plausible to argue his economic policies of ‘America First’ potentially could destroy the basis of globalization, creating trade wars that could plunge the world into economic recession.

Less traumatic but equally impacting on energy demand growth is the relationship between GDP growth and energy demand. In the OECD, rising GDP had been associated with declining total primary energy demand: in other words, improving energy efficiency. However, in the non-OECD rapidly rising GDP has also been accompanied by rapidly rising energy demand. All the forecasts have views of future potential for improved energy efficiency and this is a further factor that could disturb any historical relationship between energy demands and incomes. Greater efficiency will also be driven by improvements in technology relating to energy consumption.²⁰ The scope for improving energy efficiency is huge. One only has to compare Japanese energy consumption to other countries to imagine the scope for improvement.

Domestic prices are the result of the combined influences of international prices and domestic energy pricing policy. In the forecasts, generally only the international crude oil price is forecast. Forecasting crude oil prices has always been notoriously difficult (Huntington 1994). However, in any case, both for demand and supply, this price is misleading. For demand forecasts, crude prices are misleading because what matters are the final prices paid by the consumer. This requires a view of what sales and other taxes will be imposed by the relevant government on product prices. Taxing oil products is a tax collector’s dream. It involves a very large tax base since oil products are involved in all sections of the economy. In the short term demand is very price inelastic, which means high tax rates can be imposed without having much impact on the quantity sold. Finally, collecting the tax is extremely low cost. For many years many OECD governments have taken advantage of all these factors and as a result have imposed very high levels of sales and other taxes to raise revenue. Over the last few years, many other governments have also come to realize this potential source of revenue. One consequence has been that when the crude oil price collapsed after June 2014, many governments took the opportunity to use sales taxes to capture the revenue released by the lower price. At the same time, countries where oil products were subsidized took the opportunity also to reduce the level of subsidies. The result is that oil product prices to the final consumer are now and in future likely to be much higher than those assumed in many of the forecasts.

For supply forecasts as well, the crude price can also be misleading. For producers what matters is the price received after the fiscal system has taken its share of the economic rent. Thus lower prices can be offset by an easing of the fiscal terms.

There is another supply-side complication that appears to be neglected by most forecasters. A consequence of the collapse of oil prices since June 2014 has been a reduction in investment in upstream activities. The international oil companies, faced with a reduction in their cash flows, have been responsible for this (Stevens 2016b). On 14 January 2016, The Financial Times reported that Wood Mackenzie had estimated that private oil companies have shelved US$400 billions worth of upstream projects. This involved sixty-eight significant projects accounting for 27 billion barrels of reserves. This was equivalent to the reserves of Norway, Brazil, and Oman combined. A similar story of reduced investment has been true for the national oil companies that account for the bulk of global crude oil supply. This is simply because their governments are desperate to secure increased revenues to buy off political discontent amongst their populations of the sort seen in the Arab Uprisings which began in Tunisia at the start of 2011. In effect, the national oil companies (NOC) are being increasingly starved of funds. Upstream oil is a business where it is necessary to run in order to stand still. Thus, all fields have a natural depletion rate. Globally this averages around 5–7 per cent per annum. Thus, lower investment in upstream producing capacity now gives rise to the possibility in the future that, if oil demand continues to increase, as all the forecasts imply, the oil market could face a sudden supply shortage leading to possible price spikes within five to ten years. Even without actual physical shortages, paper barrel markets traditionally get rather nervous when spare capacity falls, which means they could impose a fear premium on oil prices.

Obviously, the future of crude prices does matter and could well disrupt the consensus forecast discussed in Section 4.2. Since OPEC took a decision not to cut production in November 2014, the price in effect has been launched onto a competitive market for the first time since 1928. The result has been a collapse in price. This in turn was the result of serious oversupply leading to a record increase in oil inventories. A key question concerns the level of ceiling and floor prices. The floor price is the short-run marginal cost (the variable cost) of the highest-cost producer. Leaving aside Canadian oil sands that are too small to make a difference globally, that floor price is defined by reference to the costs of US tight oil production. That figure is not known for sure if only because the technology has constantly been improving, allowing for cost reduction as a result of improved efficiency. However, putting it around US$25–30 per barrel is not unreasonable. The ceiling price currently is set by the ‘fracklog’. This refers to the large number of wells in the United States that have been drilled but not completed. They were drilled because the terms of their leases required drilling but they were not fracked because prices were too low. Since the end of May 2016, oil prices have shown signs of recovery. If prices begin to rise, at some level probably between US$50 and US$60, these wells will be completed and new supply will quickly enter the market, relieving any signs of shortage.

All this suggests that absent any major geopolitical event, oil prices will remain below US$60–$70 for a number of years.

Another area where the consensus energy forecasts may be misguided lies in the aftermath of COP21.²¹ The Paris Agreement created a legally binding framework coming into force in 2020, once fifty-five countries accounting for over 55 per cent of global emissions have acceded to it. The agreement includes the long-term goal of holding ‘the increase in the global average temperature to well below 2°C above pre-industrial levels, and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels’, and of achieving ‘a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century’. In pursuit of this goal, parties are obliged to submit ‘intended nationally determined contributions’ (INDCs) setting out their pledges for climate action and to review them every five years.²²

Current estimates are that the collective impact of the NDCs covering 146 countries, submitted as of 1 October 2015, would have a 50 per cent probability of limiting the global forecast temperature rise to 2.7°C by 2100, with a range of 2.2°C to 3.4°C (subsequent submissions would take the total number of NDCs to 160, covering 187 countries). They would slow global emissions growth by approximately one-third for 2010–30 compared to 1990–2010. To increase the likelihood of maintaining global warming below 2°C over the twenty-first century (with CO₂-equivalent concentrations in the atmosphere in 2100 of about 450 parts-per-million or less) would require a global reduction of 40 to 70 per cent of greenhouse-gas emissions by 2050, which would require much deeper emissions cuts than most countries are planning. To address the gap between current action and what is necessary to stay below 2°C, a ‘facilitative dialogue’ will be held in 2018 to give parties the opportunity to confirm or update their NDCs when the agreement becomes effective in 2020. The first formal review will then begin in 2023, leading to new NDCs.

It is entirely understandable that the implications of this new and major global agenda for the energy forecasts described in Section 4.2 are far from clear. Much will depend upon how far the NDCs will compete with each other. This will affect total energy consumption but, above all, it will determine the likely future energy mix. Currently the debate about unburnable carbon is well underway (McGlade and Ekins 2015; Stevens 2016b), but its outcome is uncertain. Pending the conclusion of this debate, the implications of this for future energy consumption remain uncertain.

This chapter has so far reviewed the extremely challenging global economic context in which policy decisions by the established and newer developing-country oil and gas producers need to be made. Later chapters of the book examine various components of those policy choices in greater detail. This present chapter is a clear reminder of the inherent economic challenges of engaging with the global oil and gas markets. However, those challenges do not end with the various economic and technological arguments outlined above. In addition, all oil and gas producers need to frame their decisions in the light of a volatile and changing global political economy. Hence this chapter ends with an assessment of some of the main features of the current geopolitics of oil and gas, especially in the Middle East. Obviously, there is a long list of possible events that could derail the forecasts in terms of their impact on supply and expectations. However, two areas of uncertainty dominate. These are the impact of the current lower prices and the parlous state of the Middle East.

Figure 4.6 illustrates estimates of the budgetary break-even prices for oil for the OPEC members in the summer of 2014: that is, shortly before the start of the oil price collapse.²³ The weighted average for OPEC was US$102 per barrel. Given the much lower prices experienced since the end of 2014, many countries face serious budgetary constraints. Some countries had accumulated financial cushions; largely Saudi Arabia, Kuwait, UAE, and Qatar. However, for the rest there was little protection, which means the governments are now struggling to find the revenues necessary to buy off the sort of domestic political dissent that triggered the Arab Uprisings from the start of 2011. Many producers face serious political challenges that in some cases, such as Venezuela and Nigeria, threaten the very existence of the state. This could easily affect their future ability to supply global markets. Such geopolitical disruptions in turn could well frighten the paper barrel markets and lead to higher prices. In this context, a key question is how far Saudi Arabia, as the dominant global producer, will be willing to maintain spare crude oil producing capacity.

As Figure 4.7 illustrates, the level of spare capacity to produce crude oil has been a crucial part of the oil market story and goes a long way to explain the historical pattern of prices. When spare capacity gets close to zero, the market becomes very vulnerable to price spikes. Since the summer of 1985, a central pillar of Saudi Arabia’s oil policy has been to maintain spare capacity (of the order of 2 to 2.5 million barrels per day) in order to calm markets in the event of geopolitical supply disruptions.²⁴ In the summer of 2014, Saudi policy changed its approach, moving away from administering and controlling the market to a policy geared to maintaining market share and leaving price to find its equilibrium level in a competitive market. This to force the supply curve to go the right way for the first time since 1928: the low-cost producers supplying first, and increasingly higher-cost producers supplying the residual.²⁵ As 2016 developed, the Saudi policy reverted back to trying to defend price by trying to get agreement within OPEC and with some non-OPEC producers to restrict production. It remains to be seen how successful this policy may be. However, as already discussed, the shale technology revolution has significantly increased the price elasticity of supply of crude oil. Thus, any tendency to see increased crude prices is likely to produce a rapid supply response to choke off further increases. Oil prices are therefore likely to be lower for longer than many expect.²⁶

The second dominant geopolitical issue that could impact the energy forecasts concerns the state of the Middle East and North Africa region (MENA). For reasons too complex to explain in this short chapter, the MENA region is in turmoil. It is necessary to go back to 1918—the end of the First World War and the collapse of the Ottoman Empire—to find a period of similar uncertainty in that region compared to today.

One dimension of this uncertainty concerns the deterioration of relations between Saudi Arabia and Iran. Iran, coming out of a sanctions regime following the Joint Comprehensive Plan of Action (JCPOA) agreement on its nuclear programme in 2015, is now determined to restore its crude exports to pre-sanctions levels and beyond. This directly conflicts with Saudi Arabia’s determination post 2014 not to cede market share. It was this determination that caused Saudi Arabia to cease its swing role and begin instead to protect its own market share. This in turn was linked to a general perception of ‘Shi’a encirclement’ within the kingdom in 2015 with President Assad in Syria appearing to secure his position, Iran developing a détente with the United States, and the growing Houthi involvement in Yemen. This sense of threat, real or otherwise, encouraged the new regime of King Salman, fronted by his son Mohammad, to adopt a more aggressive foreign policy. It remains to be seen whether Saudi Arabia’s reversion to a policy of controlled supply in 2016 will change this situation.

This Saudi–Iranian rivalry could be dangerous politically for the MENA region. Iran is already deeply frustrated by what it sees (with some justification) as President Trump trying to renege on the JCPOA nuclear deal. Thus, there are threats of heavy fines imposed by the US Office of Foreign Assets Control on banks operating in the United States (which covers virtually all major banks, American or otherwise) and continued sanctions for dealing with the Iranian Revolutionary Guard Corps (IRGC). This is especially significant since the IRGC could be covertly involved in almost any Iranian business operation. As of August 2017, it appears that President Trump intends to take an increasingly hard line against Iran. If as a result Iran’s frustration is not assuaged, might it jump before it is pushed and abrogate the JCPOA nuclear deal? Given Iran’s ability to cause significant mischief in the region, this could well prove dangerous and could well be another factor de-railing many of the energy forecasts that have determined the current consensus view on the future of oil and gas markets.

The future of oil and gas markets looks very different from the experiences of the last fifteen years—many oil and gas producers, especially in the developing world, thus need to adjust their expectations and adapt their policy options. Expectations of great wealth at the top of the commodity super-cycle are no longer realistic. There are many reasons to think that oil and gas may not necessarily be produced at the levels expected by many low- and middle-income countries and that, even if production does not disappoint, the consequent revenues to their governments may well prove illusory. At the very least this will require them to re-think how to manage the expectations of their peoples, which had been inflated to unrealistic levels.