Is it a floor, or a ceiling?
Competitive market conditions would therefore dictate that Saudi Arabia and other low-cost producers always operate at full capacity, while US frackers would experience the boom-bust cycles typical of commodity markets, shutting down when global demand is weak or new low-cost supplies come onstream from Iraq, Libya, Iran, or Russia, and ramping up production only during global booms when oil demand is at a peak.
Under this competitive logic, the marginal cost of US shale oil would become a ceiling for global oil prices, whereas the costs of relatively remote and marginal conventional oilfields in OPEC and Russia would set a floor. As it happens, estimates of shale-oil production costs are mostly around $50, while marginal conventional oilfields generally break even at around $20. Thus, the trading range in the brave new world of competitive oil should be roughly $20 to $50.
Makes sense to me.
[Update a few minutes later]
I’ve long said that oil over a (inflation adjusted) hundred dollars a barrel was unsustainable. This would seem to validate that.
Related.
Unlike shale oil, which requires constant drilling of new wells to maintain output levels, once an oil-sands site is developed it will produce tens or hundreds of thousands of barrels a day, steadily, for up to three decades.
Does anybody know anything about how shale wells get shut-in and restarted? I assume that the actual fracking has to occur periodically during the life of the well, so that implies that you have to close down the supply of water and weird chemicals when you shut-in the well, then reestablish it when you restart. If you’re not fracking the well often enough, does the oil/gas migrate somewhere where it’s harder to pump out?
Any of these factors would tend to make the spread between the price to shut-in and the price to restart wider. I think that means that, for a conventional producer, you first want to drive the price down below the shale well shut-in price to drive out the frackers, then keep it below the restart price to keep them out. So the market ought to clear at something close to the shale well restart price.
Of course, the big news here is that shale wells and tar sands have completely destroyed OPEC as a cartel. That’s good for everybody except the most loathsome of the oil states–and that’s good for everybody too.
I don’t work on the production side, so this is just how I understand the process. Fracking is short for fracturing – the oil or gas-bearing rock formation is cracked apart to allow more porous pathways for fluids and gases to flow to the well bore.
A producer will frack a well when it is drilled, at the pay zone. Fracking fluids are pretty much all recovered at the end of the frack job, with any leftovers ending up in the produced fluid where it is dealt with appropriately. The fracking crew then goes away to a new well.
If a well is producing economically, it will be left alone until it becomes un-economic to produce, i.e. it might need to be re-fracked at a different stratum, or more likely it might just need a clean-out, or the pump may need rebuilding, or it may be left alone to rest and rebuild volume & pressure, or it might just be capped and abandoned. There is no “water and weird chemicals” routinely going into a well. Production engineers make good money figuring out what each well needs to produce most efficiently. Low oil prices won’t shut in producing wells, but they will stop the drilling of new wells and may reduce the maintenance budget.
By the way, tar sands is not an accurate name, though the early explorers had nothing else to compare it to. Tar comes from coal. Today, that name is typically used by the watermelon crowd to denigrate the business. They are oil sands.
Thanks, that’s helpful.
Oil sands, eh? It’s a bummer when I find myself behind the nomenclature curve. But I’m glad to know how not to give offense if I ever find myself chatting up some touchy alkane at a party.
Considering, if this is true, that oil prices were artificially high because OPEC was gouging the market, they are rather lucky that helped the social warriors political goals otherwise there might have been a real war for oil. A OWS that set its sights on oil profits rather than Wall Street could have been bad news for OPEC.
While the cost of producing shale oil might well be around $50/bbl, most pundits suggesting an $80/bbl floor are pointing to that $80/bbl as the marginal cost for production in much of Russia and Canada.
But economics and history suggest that today’s price should be viewed as a probable ceiling for a much lower trading range, which may stretch all the way down toward $20.
Doesn’t make sense, most producers would be losing money at $20.
Curt’s comment didn’t come up for me until after I’d posts.
Interesting.
Then they’d quite producing until demand increased and raised the price again. That’s why it’s called a trading range.
I think $20 would be outside the trading range, as I said, most producers would be losing money, not just some, so around 50 million bbls a day would be being produced at a loss, a big loss for much of it, production would start to decline once it got below the $40/bbl.
Don’t forget that technology can and most likely will make a hash of all predictions.
As we just saw
“Russia’s average cost of oil production, according to London-based consulting firm Energy Aspects, is a shade over $40 per barrel, slightly under the global average of $50. (Saudi Arabia’s, by contrast, is just over $20 per barrel.)”
http://www.newsweek.com/2014/12/26/russias-oil-fire-292090.html
Here we have the written article suggesting above $40 as the floor, while the video has way higher numbers (Brazil $70+, Canada $50 – 100).
http://www.cnbc.com/id/102326971#.
I read elsewhere that Saudi Arabia can get oil out at $6 a barrel. It probably depends on the oil field in question. I remember hearing several years back that Canada could get oil out of their tar sands at $45-55 a barrel but the cost might have gone down by now with improved technology.
Like the article says it depends on how expensive the shale oil is to produce. If it is correct that they can produce shale oil at $40/barrel, as allegedly was told by the CEO of ExxonMobil, then $50 might indeed be the ceiling for the next decade.
How soon before we start hearing “now that gas prices are so low it is a good time to raise the gas tax”?
We’ve already heard it. Senators Jim Inhofe (R-OK) and John Thune (R-SD) have both said it should be considered. The Republicans sure seem to have a death wish….
That’s already been happening.
http://www.economist.com/news/leaders/21639501-fall-price-oil-and-gas-provides-once-generation-opportunity-fix-bad
I am not in favor of it though.
Maybe if we could somehow get a President that will do some saber rattling and shout bomb bomb Iran we could get those oil prices back up?
If we can keep oil prices this low, Iran be broke.