I, for one, welcome our new Canadian Banking Overlords

[Kidlicious]

NYE, did you miss that I said some of the oil was produced @ $70/bbl, not all.

[notyoueither]

Yeah, I saw that.

It isn't really relevant since that oil field would have be coming off pop star faces, or something. Seriously. $70 cost of production? The price of oil has very seldom come within range of that and has not been above that for very long.

Besides, I wanted to take the opportunity to post the nice chart I found. I have my doubts about it. I seem to recall $20 earlier than it shows, but I still think it is swell.

[Kidlicious]

"Opec itself estimated in its annual outlook, published in July, that the marginal cost of oil was between $70 and $90, and noted it was determined by the cost of oil extracted from unusual sources, including oil sands in Canada and liquid fuels derived from natural gas."


Oil finds platform for high price

Chris Stanton

Last Updated: September 13. 2008 9:08PM UAE / GMT
Black and Blue: Opec producers are under intense pressure to juggle budgetary obligations. Joe Klamar / AFP
As the oil price shrugged off a looming hurricane and a cut in supply from Opec, briefly dipping below US$100 a barrel, traders on global oil markets held their breath, wondering if the price would collapse.

After all, the price of a barrel stood at just $10 a decade ago, and the industry is famously cyclical.

But all signs indicate that the three-digit oil price is not just an empty bubble, and that higher drilling costs and political considerations will sustain high prices for years to come.

Lost in the public debate over whether Opec should reduce production to boost prices is the reality that it is becoming significantly more expensive to bring new barrels to market, meaning a natural oil price floor is much higher than many people might think.

Skilled personnel and equipment are in short supply and much of the “easy oil” has been tapped, meaning engineers must now look for reservoirs in more difficult environments, such as deep beneath the ocean or under the polar ice caps. In addition, unconventional and expensive sources of liquid fuels, including biofuels, are now relied on to meet a part of the world’s increasing demand for energy.

In a research note this month, analysts at Goldman Sachs estimated that the marginal cost of oil production now hovers between $80 and $90 per barrel. The finding echoed a similar estimate reached by MFC Global Investment Management earlier this year.

Opec itself estimated in its annual outlook, published in July, that the marginal cost of oil was between $70 and $90, and noted it was determined by the cost of oil extracted from unusual sources, including oil sands in Canada and liquid fuels derived from natural gas.

“Rapidly rising upstream costs point to higher break-even prices for some capital-intensive and highly costly oil investments projects,” the report said. “The marginal cost of producing alternative fuels, be they oil sands or Fischer-Tropsch liquids [derived from natural gas], is probably now higher than $70 a barrel.”

In a free market, the price of something should, in theory, be equal to the marginal cost, or what it costs to bring the most expensive supply to market to satisfy demand. However, oil is not sold in a fully free market, since Opec and other structures exist to regulate supply and, in turn, offer some control of prices.

But last week in Vienna, Opec oil ministers could be heard frequently making the case that rising marginal costs, combined with the falling price of oil, were factoring into their decisions on production.

Hussein al Shahristani, the Iraqi oil minister, told reporters before the Opec meeting that the cost of new projects in the country’s war-ravaged oil industry could be covered only with a minimum oil price between $70 and $90.

Mohammad Ali Khatibi, Iran’s Opec representative, voiced a similar sentiment. “International oil companies say that producing a barrel of crude in some new fields costs $80, so the oil prices cannot be lower than this, considering a reasonable profit for production,” he said.

Both countries are seeking to substantially increase their production of oil in coming years. This will help compensate for the declining production in countries outside Opec.

For all Opec producers, including the low-cost Gulf exporters for whom marginal costs barely register as a concern, the price floor is also determined in a large part by budgetary obligations, which have ballooned amid record prices. Investment in grand projects such as Saudi Arabia’s economic cities and Venezuela’s welfare programmes was spurred by high oil prices, and Opec will seek to ensure that prices remain high for those projects to be completed.

According to a report by PFC Energy, a consultancy based in Washington, Saudi Arabia will need prices to stay above $62 a barrel to balance its budget next year.

Jean-Francois Seznec, a professor at Georgetown University who specialises in Gulf economics, confirmed the PFC assessment. “In my own computations, I think the minimum the Saudis need to run their budget, subsidies and state investments is about $50 to $60 per barrel FOB, that is a very minimum WTI [West Texas Intermediate Crude price] of $60 to $70 per barrel,” he said.

FOB, or free on board, is an export price that does not include the cost of shipping.

The Saudis fiscal needs pale in comparison to other Opec members, however. PFC said the Venezuelan budget required a minimum price of $97 next year, while Nigeria will look for prices to stay above $71.

The UAE, Kuwait and Qatar have much smaller budgetary obligations compared to oil revenues, and analysts estimate they need prices to stay only in a range of $30-$50 a barrel.

But oil’s price floor is not merely set by high-cost producers and Opec members’ budgets, but also by political considerations in consuming nations. High oil prices are needed to sustain the drive toward developing alternative energy resources.

With the oil price above $100 a barrel, industrialised nations have recommitted themselves to developing nuclear power and producing energy competitively from the sun, wind and biomass. Such developments take time and money, and a sharp fall in the oil price could eliminate the incentive to pursue such policies.

When oil hit a series of then-record highs in the 1970s, governments in the West vowed to end their dependence on imported foreign oil and poured billions of dollars of funding into renewable energy sources.

When prices crashed in the 1980s, however, interest in alternatives dried up. Homeowners who had invested thousands into rooftop solar panels were stuck with the reality that they would never recoup their investment.

Today, the alternative energy industry that is perhaps most vulnerable to swings in the oil price is biofuel, which is a direct substitute for petrol and diesel and has become incorporated into the marginal cost of oil.

The industry in the US, Europe and South America has boomed amid high oil prices and government subsidies designed to diversify energy sources.

In March, Ali al Naimi, the Saudi oil minister, estimated that oil prices would have to remain between $70 and $80 a barrel in order to make biofuels cost-effective. He characterised the price range as the absolute price floor of the oil market.

Wallace Tyner, a professor of agricultural economics at Purdue University in Indiana, estimates that if US Congress interest in continuing expensive subsidies lags and corn prices remain high, US ethanol production will be competitive only if crude prices remain above $100 a barrel.

“If oil stays above $100 per barrel, corn ethanol, under normal conditions, will be viable simply because of the energy demand for it as a substitute for gasoline,” Mr Tyner wrote in an article published in a research magazine in July. “We have entered a new era in which agriculture supplies not only food, feed and fibre, but also fuel.”

Mr Tyner said yesterday that if oil prices continued their slide, it could mean trouble for the industry.

“If oil falls to $80, gasoline would fall as well, and that would bring down the equilibrium price of ethanol,” he said.

“A lower ethanol price would not support the high corn prices we see today, so there would be a real cost squeeze, and ethanol production could fall.”

[notyoueither]

Interesting, and misleading. I am sure you can spend $70, or even $700 to produce if you really want to. You should be able to drill in Antarctica for whale oil if you are really desperate.

Linking that number to the oilsands is rather silly though.

There would be no oilsands development if cost of production were what they report. Take a look at historical prices of oil. Why would more developments in the oilsands have moved ahead in the 90's?

[notyoueither]

The Saudis fiscal needs pale in comparison to other Opec members, however. PFC said the Venezuelan budget required a minimum price of $97 next year, while Nigeria will look for prices to stay above $71.

Hugo is going bankrupt!

Did they pause to think of when oil has ever cost that much?

[Kidlicious]

Originally posted by notyoueither
There would be no oil sands development if cost of production were what they report. Take a look at historical prices of oil. Why would more developments in the oil sands have moved ahead in the 90's?

Each new project has a higher marginal cost. Well that's not always true, but often it is.

[notyoueither]

Actually, when you are developing new technology, such as in the oilsands, the reverse is true to a massive extent.

[Traianvs]

Originally posted by notyoueither
Actually, when you are developing new technology, such as in the oilsands, the reverse is true to a massive extent.

Maybe, but you have to take the costs of developing that technology into consideration as well. Extracting oil from these sand fields is no simple task, and I reckon that research into better techniques is similarly complicated

But from a logical point of view in the long run it will become cheaper

[Kidlicious]

Originally posted by notyoueither
Actually, when you are developing new technology, such as in the oilsands, the reverse is true to a massive extent.

So you are saying they start the projects that make the oil at a higher marginal cost first?

[notyoueither]

Originally posted by Traianvs


Maybe, but you have to take the costs of developing that technology into consideration as well. Extracting oil from these sand fields is no simple task, and I reckon that research into better techniques is similarly complicated

But from a logical point of view in the long run it will become cheaper

The provincial government gave large incentives to get development going. The projects have been given 1% royalty rates with the difference between that and the normal royalty going to offset the cost of building the projects.

The province has also funded a significant amount of research on the technology for extraction.

Originally posted by Kidicious


So you are saying they start the projects that make the oil at a higher marginal cost first?

I'm saying the cost of extraction decreases as the technology improves.

The marginal cost of the oilsands has decreased since development began 30 years ago. It has recently increased some due to higher material and labour costs during a lengthy boom, but overall the cost of producing oil from the oilsands is decreasing.

It was never $70. Nobody would have turned a shovel.

[Kidlicious]

Originally posted by notyoueither
I'm saying the cost of extraction decreases as the technology improves.

That's obvious.

The marginal cost of the oilsands has decreased since development began 30 years ago. It has recently increased some due to higher material and labour costs during a lengthy boom, but overall the cost of producing oil from the oilsands is decreasing.

Do you know what marginal cost is? It's the cost of the most expensive barrel of oil produced. You are saying that that's decreasing while the price for oil is increasing. It doesn't work that way. It's the exact opposite of what you are saying.

It was never $70. Nobody would have turned a shovel.

That's not necessarily true when the price of oil is $140/bbl and everyone expects it to increase. How do you think busts happen?

[notyoueither]

Hmm. I have neglected the fact that there are areas that have higher costs to produce. I've been thinking of the areas where existing projects are and their leases.

Yes, there are areas where new projects could soon produce at higher costs.

Existing projects do not have costs anywhere near $70.

Also, I suppose as the price of oil increased, existing projects could produce some higher cost barrels as they wring the last drop from the surrounding material.

All that is very well, that does not mean that existing production at established projects has a cost of $70. That's ridonkulous, which is the original point. Since you're being persistent, I checked a bit. New projects have a cost per of ~$40 including capital, transportation, and upgrading. Note that would include abnormally high material and labour costs to build. Those would be among the most expensive barrels produced.

[Traianvs]

I'm wondering: if prices rise so rapidly and extraction from oil sand and oil fields that were previously too small to be viable for exploitation start being developed, then why don't we put the gigantic extra costs for more extraction research and actual extraction into more funds that increase clean energy techs?

I can understand these alternative techs are not always the optimal way to go from an economical point of view right now, but as we all know most corporations and credit lenders seldom have long term programmes. We all know that carbon based fuel (except coal mines maybe) will conceivably be sold at increasing costs, and with all the hazardous side-effects like health and environmental problems it strikes me as a stupid investment.

Then again you can still make a good buck out of the oil industry, just like speculators on the stock market are doing well for themselves (like the infamous Paulson bastardos). Still alternative techs, although not sufficient for the majority of our energy production for another few decades, is the way to go. There's a whole new market, with potentially lots of job possibilities too.

Over the last few years I've heard a lot of important people in high places around the world who are involved in energy related business that extensively talked and communicated about this issue, so why doesn't it break through? Is it the cliché that the oil industry and its lobbyists are simply making our system impervious to a change in energy policy? I hear Obama being a proponent of more clean energy, but that's most likely just propaganda speech. I tend to think about Al Gore in that respect. If he as VP couldn't achieve a change of thought in American gov. when he was still in power, then what can be done at all?

In the end the only authorities with enough power to start a dynamic in another direction are - sadly - still national governments, of which the US specimen is the most important to this day. If they are not capable of forcing a policy switch, then who can? Our capitalist economy only effectuates changes in the short term and it lacks an authority with comprehensive leadership. NGO's, grassroots organisations and other institutions that try to bring awareness to the public opinion are not successful, because they mostly reach the already convinced people only. And in a way humans are part of the capitalist mindframe, as they can't fathom future events to their full extent. It's a consumer that can't hold 50 years from now into consideration. Lastly, international organisations do much good, but in our current worldwide framework they are still dependent on the cooperation of national governments, who as I have pointed out have not yet taken drastic measures...

Maybe if proponents of absolute sovereignty in international relations agreements would soften up their stance a little, like the UK in the EU, there would be an opening?

[Kidlicious]

Good post Trai. Maybe it goes better in my thread though.

[Ben Kenobi]

I'm wondering: if prices rise so rapidly and extraction from oil sand and oil fields that were previously too small to be viable for exploitation start being developed, then why don't we put the gigantic extra costs for more extraction research and actual extraction into more funds that increase clean energy techs?

One major reason, portability. You can't carry a hydro dam with you.

Is it the cliché that the oil industry and its lobbyists are simply making our system impervious to a change in energy policy?

It's all about the energy density.

Maybe if proponents of absolute sovereignty in international relations agreements would soften up their stance a little, like the UK in the EU, there would be an opening?

It isn't because of local government opposition, but simple science that dictates the demand for oil and gas extraction. The only way to do the other way is to subsidise ineffecient technologies, and that's really not the way to go if you want to maximise your investment.

I'm rather surprised that environmentalists believe that it's because there's a cabal arrayed against them that their ideas are not adoopted. If anything, it's precisely the opposite. There's a cabal against things like nuclear which are clean, but taboo.