Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Exxon Mobil is causing people to smoke more.

OK, that’s a twisted reading of the facts. Actually, it turns out that cheaper gasoline is one factor sparking an unusual pickup in U.S. cigarette sales, according to an article Friday by Jennifer Kaplan at Bloomberg News. So it isn’t Exxon’s fault that some drivers choose to spend saved dollars on their other addiction; you might just as easily blame Big Electronics for making mobile phones and TVs so damn reasonably priced.

The report comes just as Exxon is in the news elsewhere, only this time about some potentially real twisting of facts. The company faces an investigation from the New York attorney general over whether it covered up information about the impact of climate change on both the public and its own profits. Exxon has denied this.

Not many investors will sell Exxon’s stock on the notion that it is facing some sort of Big Tobacco moment. Friday morning’s slight drop had more to do with how the good news of stellar U.S. jobs numbers turns into bad news for oil by bolstering the dollar (it really is a twisted world we live in). Chevron’s shares are down even more.

Yet it would be foolish to simply ignore the growing, and motley, crew of everyone from the New York AG to the pope ratcheting up the pressure on fossil fuels.

How it plays out exactly is anyone’s guess, but here is one prediction: It will help set up the next big rally in oil prices.

To understand why, look at how Big Oil is spending its money these days, or rather isn’t. In their latest updates, BP, Chevron and Total slashed their combined capital expenditure budgets for 2017 by as much as $29 billion. Exxon didn’t change guidance but hinted it could be running below its existing projection due to savings. Royal Dutch Shell didn’t give exact numbers but re-emphasized its commitment to paying big shareholder distributions.

Exxon Mobil Capital Spending, In Billions

In a report issued this summer, energy economist Philip Verleger pointed out that the spending needed to bring on adequate oil and gas supply in the next decade or so looks infeasible. The International Energy Agency has estimated that the world needs to spend an average of almost $800 billion a year through 2020 -- and that is in 2012 dollars -- rising to more than $850 billion by the 2030s. Based on a survey published by Barclays in September, Verleger sees investment next year being perhaps $450 billion.

The exact number isn’t really important. It is clear that capital is being sucked out of every part of the value chain in oil and gas, be it the U.S. shale producers, pipeline builders, oilfield services firms or the big projects traditionally reserved for the majors, such as Arctic drilling and oil sands. The latter, especially, looks even less attractive now that President Obama has finally blocked the Keystone XL pipeline from Canada.

Barring a demand shock such as China’s economy hitting a wall, this will play out as follows. Oil prices and spending will stay weak through much of 2016 as inventories remain high. The majors will focus attention on picking up assets cheaply as smaller E&P firms struggle -- but that just consolidates supply rather than adding to it.

By 2017 or 2018, swollen inventories of oil will be falling and oil prices will rise, as the slowdown in investment by the industry finally starts to make itself felt in terms of potential barrels not showing up on the market. At that point, OPEC will have wrested back some market share and pricing power, and oil likely will be ending the decade on an upswing.

So the attentions of New York’s attorney general are actually bullish? On a three-to-five year horizon, yes. If E&P firms survive the next 12 months or so, their valuations should rise as higher oil prices hove into view.

But the oil business generally needs to look a bit further ahead. Besides the negative PR -- which Big Oil is hardly a stranger to anyway -- sucking capital out of a business is how you kill it in the long term.

If you think $40 oil is bad for the industry, consider that U.S. gasoline demand hit its highest level this summer since before the financial crisis. Consumers love low prices, especially if they are stable to boot.

It is high and volatile prices that deter them -- and that is exactly what will result as oil companies withhold investment in the face of uncertainty around when and how carbon curbs kick in, continuing oil's long-standing cycle of boom and bust. But hey, as pump prices rise, at least we’ll probably be smoking less.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at

To contact the editor responsible for this story:
Mark Gongloff at