August 24, 2008
Marginal Oil Production Costs Rising

Rising marginal production costs for additional barrels of oil put a pretty high long term floor on oil prices.

Last year analysts estimated it cost around $60 a barrel to produce light oil from here. The most recent estimate from the Canadian Association of Petroleum Producers (CAPP) now puts that number at $75 to $90. Comparatively, Saudi Arabian crude is said to cost around $1 a barrel.

The oil tar sands in Alberta are not the only expensive place to produce oil. The deep water Gulf of Mexico oil has a similar cost.

Peter Robertson, vice chairman of Chevron, recently told lawmakers that the cost of new production in the deep water Gulf of Mexico could exceed $95 a barrel.

I would expect Tupi and other deep water fields off of Brazil to have similar or even higher costs.

One can find a similar trend across the fossil fuels extraction industries. Chesapeake Energy, a big natural gas outfit, reports more than a doubling in the cost of natural gas extraction from 2Q 2003 to 2Q 2008.

A deep recession could cause prices to fall below marginal costs. But prices will eventually rise up to or above marginal production costs. The age of cheap fossil fuels has ended. We can't enter a new era in cheap energy prices without breakthroughs in solar, nuclear, and biomass energy.

Share |      Randall Parker, 2008 August 24 01:39 PM  Energy Fossil Fuels

th said at August 25, 2008 5:30 AM:

Just 10 years ago the average price of oil for over 70 years was $19, the effects of asian growth is stunning on world commodity prices. Our consuming everything and making nothing economy is going to find it tough.

Nick G said at August 25, 2008 11:24 AM:

Randall, a couple of thoughts.

First, these kinds of articles overlook shortrun capital expenditure lag problems. IOW, when oil rigs are suddenly in short supply, their price shoots up, but that price will fall again as manufacturers ramp up production. The same thing applies to almost all of the costs involved here, especially labor. PO enthusiasts assume that rising costs are due to the rising price of oil inputs (or one or another of the very few commodities that is truly scarce, such as copper), and that's rarely the case.

2nd, electricity is still cheap, especially in the US, and while it's rising somewhat, it's not going to rise anything like oil has - coal is plentiful, existing nuclear is cheap, and those comprise 70% of electricity generation. You can power a car with electricity for well below $.10/mile, including battery costs, and that cost will only fall, as it's dominated by falling battery costs.

th said at August 25, 2008 3:57 PM:

nick g, I thought it was a bit of an exaggeration until I went to Transocean's website and under rig fleet update there was a reference to a rig being built for a Chevron contract that was using $70 to $100 as a floor-ceiling parameter for setting dayrates, this one rig was a bit of an anomaly compared to the others, maybe because its a newbuild..

Paul F. Dietz said at August 27, 2008 10:52 AM:

There's probably also a shortage of capacity for building oil rigs, so the price may very well be higher than the cost.

Nick G said at August 27, 2008 2:31 PM:

"There's probably also a shortage of capacity for building oil rigs,"

Yes, it takes a while to ramp up production, and then much longer to fill back-orders. I've heard that back-orders go out 5 years!

Raul Mieto said at August 27, 2008 2:32 PM:

That's a relief! Now maybe people will stop talking about this peak oil nonsense.

th said at August 29, 2008 5:26 PM:

Raul, if they can do this with natural gas, ....,
they might be able to do it with oil. In the US, there is a well defined push by politicians to promote green fairy over carbon, peak oil is becoming reality thru political meddling. We may actually have another 100 years of oil left with some more prudent use of it and making politicians get out of the way and letting this industry do what it does best. The oil crisis in the seventies was eventually resolved by drilling not alternatives, non-opec supply has always been the overriding factor in world oil supplies. While its widely thought the easy, cheap oil has been found, the same thing was said for US ngas supplies, the next big supply for US gas was supposed to have been LNG imports, they have even reopened LNG terminals closed since the 80's. US energy policy has been a joke for many years, send in the marines is the result of US complacency on domestic development and lack of discipline on oil consumption, that may be changing, the voter has to decide what they want.

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