I found this interesting.

From FT blog,


Marginal oil production costs are heading towards $100/barrel

Kate Mackenzie (FTalphaville)

Bernstein’s energy analysts have looked at the upstream costs for the 50 biggest listed oil producers and found that — surprise, surprise — “the era of cheap oil is over”:


Tracking data from the 50 largest listed oil and gas producing companies globally (ex FSU) indicates that cash, production and unit costs in 2011 grew at a rate significantly faster than the 10 year average. Last year production costs increased 26% y-o-y, while the unit cost of production increased by 21% y-o-y to US$35.88/bbl. This is significantly higher than the longer term cost growth rates, highlighting continued cost pressures faced by the E&P industry as the incremental barrel continues to become more expensive to produce. The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl.

While we see near term downside to oil prices on weaker demand growth, the longer term outlook for higher oil prices continues to be supported by the rising costs of production.

This is important because, as Bernstein analyst Neil Beveridge and colleagues note, the cost of producing marginal barrels of oil plays a big role in determining oil prices.



Analysts fail to notice what happens when the buying public is broke and cannot afford the high price of $120. What about too broke to afford $50? The same thing as if the price to bring new oil to market is $5,000! The oil stays in the ground until someone can pony up the cash. Without oil, the economy falters due to shortages and the price becomes even less affordable.

If the price is lowered from $5,000 to $3 per barrel, there is oil only if it costs less than $3 to get that barrel out of the ground. With oil harder to get in out of the way places, the cost is likely to be $3.01 … or much more. That leaves the crude where it sleeps until someone can offer equal worth for it. With returns on its use non-existent, real worth becomes more difficult to obtain. Stealing demand from others becomes more appealing than prospecting for unaffordable crude: the stolen demand represents oil in hand.

From the same article:




Gregor Macdonald

A wonderful post showing again that the price of oil is driven not be novel and arcane factors, such as speculation and financialization, but by geology, supply and demand, and the economics of extraction. The cost to deliver the marginal barrel in the post 2005 era, when global oil production stalled out, is crucially important. At bottom, the global market for oil does quite a good job at price discovery, taking in all of the various important factors. The market is quite aware of the decline in spare capacity, and these marginal costs. How much production does the world lose now, should oil fall to $75 a barrel? I can’t quantify, but it would surely lose a large chunk of future production at those levels as myriad projects would be shelved.

I note also the anger expressed in the comment section to Kate’s previous post about Peak Oil. The end of cheap oil, and the ceiling it creates on global supply of oil through a confluence of geology and economics, is a complex picture to digest and over the years I’ve come to understand that emotions run highest when people realize its very difficult to understand. However, let’s recall this was all predicted years ago: the limits on supply, the decline in flow rates, the terminal stage of Big Oil companies as they could no longer replace reserves, the explosion in finding and development costs, and the pressure on profit margins to the extraction industry. And finally, the problem of affordability.

My colleague Chris Nelder has called the tightening range between the high cost to develop the marginal barrel and the affordability of that barrel to society as the “Narrow Ledge.” That’s where we are right now. And based on the research cited in this post, the ledge is getting tighter still.



When fuel supplies are constrained, the only source of new fuel supply is the demand of other countries. That narrow ledge is sure to become a very contentious place as the cruel economies of less are played out


and this,

http://www.economic-undertow.com/2012/05....

Supply and demand at work. Supply falling, so the price goes up. Basic econ here.