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The article ignores some realities. 1) The major OPEC producers need to recover far more than their lifting costs. Their oil revenues subsidize the rest of the

by hughw 11y ago

The article ignores some realities. 1) The major OPEC producers need to recover far more than their lifting costs. Their oil revenues subsidize the rest of the economy and is their bulwark of social stability. Some estimate that Saudi Arabia needs $90/bbl. 2) Technological adaptation to the low price regime is happening as we speak. The years of $100/bbl oil developed expensive innovations, and now we are seeing those prices reduced to their marginal costs. 3) Almost no other country can use these new technologies as profitably as the US and Canada can. The US and Canada have a private mineral ownership regime, as well as a production and refinement infrastructure no other country will be able to match soon. The US has a LOT of small- and intermediate-sized oil companies competing actively right now, on all these dimensions, to lower their costs so they can continue to operate profitably even in the current price environment. Most are succeeding.

VeilEm 11y ago
That's pretty interesting about the new technologies and how small businesses can still operate profitably in the current price range. Where did you read about this?
- hughw 11y ago
  I work in the drilling data industry and have access to data as well as anecdotal observations. But there are lots of published articles e.g. [1], [2] [1] http://www.nytimes.com/2015/05/12/business/energy-environment/drillers-answer-low-oil-prices-with-cost-saving-innovations.html?_r=0 http://www.nytimes.com/2015/05/12/business/energy-environmen... [2] http://www.worldoil.com/news/2015/8/12/oil-at-30-is-no-problem-for-some-cost-cutting-bakken-drillers http://www.worldoil.com/news/2015/8/12/oil-at-30-is-no-probl...
  - fnordfnordfnord 11y ago
    Look in that data and tell me how many companies are hiring. These companies are treading water. They are furlough-ing people, laying people off, getting bought by bigger companies looking for a bargain, etc, etc, etc.
    - hughw 11y ago
      Oh, absolutely. They are adapting.
ascorbic 11y ago
That's not their marginal cost though. They may need $90/bbl to balance their budget, but they don't need $90 to pump the next barrel.
- hughw 11y ago
  Agree, that was my point. It's not relevant to talk about their marginal cost as if you could ignore their need to balance their budget eventually.
  - late2part 11y ago
    True. But let's play this out. If they can't balance their budgets, their government collapses (like Bankruptcy) and is replaced by a new Government that doesn't offer the same panem et circenses. New Government outsources oil production (like House Saud did some 70 years ago) and then the true marginal becomes the needed cost.
    - venomsnake 11y ago
      Then we have civil war and big chunk of Saudi oil is off the market and prices rise again.
tankenmate 11y ago
The break even price is estimated at current pumping rate vs gross profit; but Saudi Arabia can relatively easily increase their pumping rate. The cash cost for the Saudis per barrel is sub $5. So they can up their production rate to handle the difference; they are incentivised to do so if they truly believe that their reserves will become a stranded asset. In contrast after running and royalties cash costs in the US are up towards $30/bbl and Canadian oil sands towards $40/bbl. But, the size of wells using these technologies are smaller. And, those wells cost more to discover, and tap. This means US / Canadian oil is more affected by marginal cost, both in terms of price flexibility and liquidity (both cash and oil). And the biggest threat, in the medium term, to oil prices is some of the range of alternative energy sources. Solar costs are coming down quite rapidly. Wind is coming down but more slowly (a chunk of this is in real rather than nominal terms; depending on currency). And nuclear in time will probably come down if increasing investment leads to predicted efficiency gains. Oil isn't going to disappear overnight, but it does have a bordering on existential threat in the medium term. The only largely protected part of this market I can see here is large scale transportation, i.e. sea and air transport.
- justincormack 11y ago
  Qatar did have a gas to aircraft fuel conversion process, but not really cost effective.
- nimos 11y ago
  Oil, even at current prices, is significantly more expensive than natural gas and coal for generating electricity. Apart from remote communities oil isn't really used to generate electricity. Oil is valuable because of gasoline. Solar/Wind/Nuclear are competing in a completely different market. The real threat to the medium/long term value of oil is a good battery.
  - deleted 11y ago
    [deleted]
  - netcan 11y ago
    It's a problem to consider these separate. All energy and certainly all carbon fuels are fungible to a degree. Oil is easier to transport and bottle. Gas is more location and infrastructure dependant. If Gas prices rise or oil prices drop, we'll use oil for electricity generation too.
justincormack 11y ago
Huge numbers of US oil companies are filing for bankruptcy right now, and many are not profitable even at zero debt. I am not sure where your "most are succeeding" figure comes from.
- hughw 11y ago
  Thirty-six [1] is not "huge numbers". There are literally thousands of oil and gas companies in the US. I repeat, most are succeeding. [1] http://www.slideshare.net/MarcellusDN/haynes-and-boone-llp-oil-patch-bankruptcy-monitor http://www.slideshare.net/MarcellusDN/haynes-and-boone-llp-o...

by hughw 11y ago

VeilEm 11y ago

That's pretty interesting about the new technologies and how small businesses can still operate profitably in the current price range. Where did you read about this?

hughw 11y ago
I work in the drilling data industry and have access to data as well as anecdotal observations. But there are lots of published articles e.g. [1], [2] [1] http://www.nytimes.com/2015/05/12/business/energy-environment/drillers-answer-low-oil-prices-with-cost-saving-innovations.html?_r=0 http://www.nytimes.com/2015/05/12/business/energy-environmen... [2] http://www.worldoil.com/news/2015/8/12/oil-at-30-is-no-problem-for-some-cost-cutting-bakken-drillers http://www.worldoil.com/news/2015/8/12/oil-at-30-is-no-probl...
- fnordfnordfnord 11y ago
  Look in that data and tell me how many companies are hiring. These companies are treading water. They are furlough-ing people, laying people off, getting bought by bigger companies looking for a bargain, etc, etc, etc.
  - hughw 11y ago
    Oh, absolutely. They are adapting.

ascorbic 11y ago

That's not their marginal cost though. They may need $90/bbl to balance their budget, but they don't need $90 to pump the next barrel.

hughw 11y ago
Agree, that was my point. It's not relevant to talk about their marginal cost as if you could ignore their need to balance their budget eventually.
- late2part 11y ago
  True. But let's play this out. If they can't balance their budgets, their government collapses (like Bankruptcy) and is replaced by a new Government that doesn't offer the same panem et circenses. New Government outsources oil production (like House Saud did some 70 years ago) and then the true marginal becomes the needed cost.
  - venomsnake 11y ago
    Then we have civil war and big chunk of Saudi oil is off the market and prices rise again.

tankenmate 11y ago

The break even price is estimated at current pumping rate vs gross profit; but Saudi Arabia can relatively easily increase their pumping rate. The cash cost for the Saudis per barrel is sub $5. So they can up their production rate to handle the difference; they are incentivised to do so if they truly believe that their reserves will become a stranded asset. In contrast after running and royalties cash costs in the US are up towards $30/bbl and Canadian oil sands towards $40/bbl. But, the size of wells using these technologies are smaller. And, those wells cost more to discover, and tap. This means US / Canadian oil is more affected by marginal cost, both in terms of price flexibility and liquidity (both cash and oil). And the biggest threat, in the medium term, to oil prices is some of the range of alternative energy sources. Solar costs are coming down quite rapidly. Wind is coming down but more slowly (a chunk of this is in real rather than nominal terms; depending on currency). And nuclear in time will probably come down if increasing investment leads to predicted efficiency gains. Oil isn't going to disappear overnight, but it does have a bordering on existential threat in the medium term. The only largely protected part of this market I can see here is large scale transportation, i.e. sea and air transport.

justincormack 11y ago
Qatar did have a gas to aircraft fuel conversion process, but not really cost effective.
nimos 11y ago
Oil, even at current prices, is significantly more expensive than natural gas and coal for generating electricity. Apart from remote communities oil isn't really used to generate electricity. Oil is valuable because of gasoline. Solar/Wind/Nuclear are competing in a completely different market. The real threat to the medium/long term value of oil is a good battery.
- deleted 11y ago
  [deleted]
- netcan 11y ago
  It's a problem to consider these separate. All energy and certainly all carbon fuels are fungible to a degree. Oil is easier to transport and bottle. Gas is more location and infrastructure dependant. If Gas prices rise or oil prices drop, we'll use oil for electricity generation too.

justincormack 11y ago

Huge numbers of US oil companies are filing for bankruptcy right now, and many are not profitable even at zero debt. I am not sure where your "most are succeeding" figure comes from.

hughw 11y ago
Thirty-six [1] is not "huge numbers". There are literally thousands of oil and gas companies in the US. I repeat, most are succeeding. [1] http://www.slideshare.net/MarcellusDN/haynes-and-boone-llp-oil-patch-bankruptcy-monitor http://www.slideshare.net/MarcellusDN/haynes-and-boone-llp-o...