Why oil under $30 per barrel is a major problem

“A person often reads that low oil prices–for example, $30 per barrel oil prices–will stimulate the economy, and the economy will soon bounce back,” writes commentator Gail Tverberg in “Our Finite World.” “What is wrong with this story? A lot of things, as I see it:

1. Oil producers can’t really produce oil for $30 per barrel.

2. Oil producers really need prices that are higher than the technical extraction costs shown in Figure 1, making the situation even worse.

3. When oil prices drop very low, producers generally don’t stop producing.

4. Oil demand doesn’t increase very rapidly after prices drop from a high level.

5. The sharp drop in oil prices in the last 18 months has little to do with the cost of production.

The full explanation is here.

global-breakeven-prices-vs-daily-global-production

About jeffpelline

Jeff Pelline is a veteran editor and award-winning journalist - in print and online. He is publisher of Sierra FoodWineArt magazine and its website SierraCulture.com. Jeff covered business and technology for The San Francisco Chronicle for years, was a founding editor and Editor of CNET News, and was Editor of The Union, a 145-year-old newspaper in Grass Valley. Jeff has a bachelor's degree from UC Berkeley and a master's from Northwestern University. His hobbies include sailing and trout fishing.
This entry was posted in Uncategorized. Bookmark the permalink.

6 Responses to Why oil under $30 per barrel is a major problem

  1. John Stoos says:

    Fascinating piece Jeff, thanks for sharing it.

  2. Chip Wilder says:

    Now with the Iran Nuke deal another 1,000,000 barrels a day will hit the market. $1.00 a gallon gas?
    California, which at just over 500,000 barrels a day is the fourth largest oil drilling state in the country, is the only major energy-producing state without a significant, specific tax on taking oil out of the ground. Only state-
    It’s been hands off to tax the poor oil industry, but now that I hear they can’t make it on $30 a barrel I can’t seem to get teared up over an industry that still has record earnings, is still subsidized by the taxpayers, and yet keeps that money offshore anyway.

  3. The major confusion on the topic of the current oil situation is clearly based on the prognosticators not having accurate oil production cost information. For decades the oil media have fed and the main stream has consumed a continuous flow of miss-information – strategic marketing information regarding an exaggerated cost of oil production. This misinformation assures the oil companies can pretty much charge what they want for oil, and not be accused of gouging the consumer – which they clearly have done nearly forever. Additionally, oil wells have about a 30 year useful pumping life. Consequently, current oil production costs are primarily tied to when the wells were drilled – which on average was more than 15 years ago. Current production costs have little impact on the cost that oil can be pumped for that was drilled decades ago.

    Trying to sort out the real break even cost of oil is a difficult if not impossible task. The chart above is probably proportionally correct regarding higher cost producer regions, but even more probably highly exaggerated regarding actual production break-even costs of oil. No business purposefully sells at an overall loss, simply because they can’t economically survive for long operating at a loss.
    Observing the amounts of oil being pumped at declining prices for more than a year and now at current prices does point to the fact oil production costs are much lower than anyone would have the consumer believe – at least oil production costs by the major producers.

    The American consumer’s take away herein should be what oil can be sold for – when it suits major producers needs – and remember these prices this when the major oil price gougers once again start whining about high production costs. You simply can’t have it both ways.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s