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Marginal Oil Production Cost Nearing $92 Per Barrel


Future Pundit points to a Bernstein Research paper describing the marginal cost of oil production – Marginal Oil Production Cost Nearing $92 Per Barrel.

Energy analysts at Bernstein say the marginal cost of oil production, already $92 per barrel, is nearing $100 per barrel.

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.

Their analysis does not include OPEC or former Soviet Union producers. But this does not matter. Since the former SU and OPEC aren’t going to grow their production fast enough to meet rising world demand the marginal cost of the other producers will determine at what price rising demand and market price will meet.This rapidly rising marginal cost of production is what Peak Oil looks like. Peak Oil is going to happen because marginal cost will go too high for the world economy to afford to pay what it takes to boost production. At that point oil production will start falling. I originally expected peak production to happen at a much higher price for oil. But the European debt crisis, the deceleration of Chinese economic growth, and the continued weak US economic recovery make me think peak global oil production will happen at a price not much higher than current oil prices.

The costs of tight shale oil is very high and high oil prices are needed to keep it flowing.

“The United States is producing an awful amount of oil from tight shale and tight sands reservoirs… If oil prices send a signal and drop below the $90-$80 level it is going to be uneconomic to drill those well. So drilling will stop immediately,” said Michel Hulme, fund manager at Lombard Odier.

How high an oil price is needed to start world oil demand headed on a downward slope? Higher or lower than the current price range near $90-100?

peak energy

10 Comments on "Marginal Oil Production Cost Nearing $92 Per Barrel"

  1. shortonoil on Mon, 18th Jun 2012 4:59 pm 

    “BP said in its annual calculation of global oil and gas reserves – considered the industry’s most comprehensive – that oil reserves totalled 1,653 billion barrels at the end of 2011.”

    What BP does not inform us of is how they made this determination. Apparently this estimate was based on the projection of ever increasing future oil price.

    “Higher oil prices have allowed resources previously known to exist, such as Canada’s oil sands and certain deepwater projects, but which were previously deemed uneconomic to produce, to be profitably extracted, and therefore suitable for entry in the calculations.”

    The fallacy in this type of analysis is that it does not take into consideration the possibility that prices may not continue to rise fast enough to cover the increasing cost of production. In a post peak world (past the inflection point of the accumulated production curve) that is guaranteed to happen. The energy costs to produce oil goes up, as the percentage of its energy which is delivered to the end consumer goes down. In a post peak world the oil industry can no longer increase the supply of energy to the end consumer. Supply and demand drive prices up, but at some point the consumer finds (like now) they are having trouble paying the bill!

    Our model*, which is based entirely on the thermodynamics of oil production, makes the price; production-cost dilemma very evident. Balancing the energy equations gives a total theoretical reserve of 927 billion barrels (2012); a fair portion of the tail of this distribution will never be utilized. As the reserve is depleted the per unit costs of production goes up (this results from the production of irreversibilities in the oil reserve system). Low quality reserves that lie on the outer tail of the distribution that could be extracted today, will not be extractable tomorrow. Most of BP’s low quality additions to the reserve total will be priced out from increasing production costs in the years to come.
    To improve their projections BP should pay a little less attention to the vacillating $, and a little more to the indomitable BTU. Maybe then, they could quit playing semantic games with their investors.

    [ The Hill’s Group
    * World crude oil depletion: A thermodynamic approach

  2. Plantagenet on Mon, 18th Jun 2012 7:20 pm 

    Every time Brent oil goes over $100 for a sustained period of time the global economy slows down—as we’ve seen in 2008, 2010, 2011 and now again in 2012.

  3. Bradford Dillinger III on Mon, 18th Jun 2012 10:19 pm 

    The Bernstein result is something of a trivial tautology. Odd that it is receiving such attention, as if any novel information is involved.

    Costs of marginal production always approach the price of the product in question.

    What is far more interesting is the shut-in prices given by Bernstein for a number of different oil companies. You should have focused on that.

  4. BillT on Tue, 19th Jun 2012 2:15 am 

    The important point here is that all that oil will never be produced. Why? Have you looked around?

    How many of your neighbors got a 10% raise last year, and the year before, and the year before? (Real inflation is tracking at about 10% per year)

    How many of them are looking for work? (Unemployed or under employed)

    How many own ‘under water’ homes?

    How many will be able to buy oil products when it costs $120, $150, $200 and up per barrel? Fewer and fewer. THAT will end the growth of the GDP no matter how you fudge the numbers and will shut down most alternative sources and renewables. Do techies ever think about economics? I doubt it. But then, economists never thing about limits either. Both are fools.

  5. Max Reid on Tue, 19th Jun 2012 3:14 am 

    Well said BillT

    6 times in the past, the higher oil prices have caused recession, this is probably the 7th time and still the US economy has never recovered fully.

    Automakers were turning out more fuel efficient vehicles and people were grabbing it, on another front, CNG powered vehicles were increasing.

    At the end, every home will have a bike for short distance travel.

  6. BillT on Wed, 20th Jun 2012 12:32 am 

    I think, at the end. every home will have feet for transportation and bikes will be a luxury. Even horses will not be plentiful because they require land for food, not a short driveway.

  7. Gale Whitaker on Wed, 20th Jun 2012 4:08 am 

    The number of horses will dwindle as humans discover how good they are to eat.

  8. BillT on Wed, 20th Jun 2012 8:32 am 

    Dogs and cats also. Rats? No problem, just a little Tabasco sauce and they are quite tasty! After all, squirrels are related and they have been food for centuries. Yummy in fact. Squirrels, ground hogs, rabbits, possum, etc. All are future protein until they are extinct.

  9. BillT on Wed, 20th Jun 2012 8:35 am 

    I would add that: have you ever been in a big city without pigeons? I have. Manila has ZERO wild pigeons in a city of 15,000,000+ people, that covers 300 square miles. Why? They are edible…lol. And the statues, street lights and building ledges are not covered in pigeon crap. Signs of New York City to come?

  10. Kenz300 on Fri, 22nd Jun 2012 2:28 am 

    The U.N. announced that 2011 was a record year for global renewable energy investment. $257 billion was invested in 2011, with $147 billion of that going toward solar energy.

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