Posted on 03/24/2013 3:16:46 AM PDT by Laurent.w
Canadian Natural Resources Ltd. has rolled out two key numbers: 85 and 75.
Réal Cusson, the company’s senior vice president of marketing, on Wednesday told investors where the price of oil must trade in order for energy companies to make a go of it in the oil sands and shale gas formations.
In the oil sands, Mr. Cusson said companies will flirt with trouble if the price of crude dips to $85 (U.S.) per barrel as expansion spreads in northern Alberta.
“The economic reality is something we’ll have to adjust to. If oil goes down to $85, and there’s no certainty in the financial part of the business, it is again reasonable to expect that some of these projects will not go, or some of these projects will be at the very least differed,” he said.
It is more expensive to launch or expand a mining project compared to an in-situ operation because the latter can be done in smaller chunks.
In shale oil plays, however, companies have a bit more breathing room. In order to break even traders must pay at least $70 to $75 per barrel for crude extracted from the geologically-challenging zones.
(Excerpt) Read more at theglobeandmail.com ...
“How could oil prices drop below $40 a barrel when, outside the Middle East, new drillings make economic sense as long as oil prices remain above $70-$85 a barrel. “
Possibly as energy usage shifts to NG which is cheaper, the Middle East will have to lower the price on the world market to below $40.
fyi.....
Just a thought......
Oil is a world traded commodity with the price set (more or less) by market forces, and price calculated in dollars U.S.
We, all of a sudden, have the real potential to confidently tell the sowdis to pound sand, invite our attic (Canada) into a co prosperity sphere, and radically drop the price of oil while making huge profit.
So why is it, zippy and his administration continuing to tank/dilute/devalue the dollar? Is it to necessarily raise the price of energy? Or does this in some way continue support for the apparent strangle hold maintained by SWA?
All we need is the fed dialed back to a more constitutional level (shrink the power and scope of regulatory agencies), build more refineries, and innovate baby innovate.
YMMV
Hanging up and listening to response
Oil prices are based on what consumers are willing to pay -- not the cost of drilling.
According to The American Oil & Gas Reporter’s annual Survey, for crude oil, 25.8% of independent U.S. oil producers would trim their drilling programs at a WTI spot price of $72 a barrel.
Leading oil services firm Baker Hughes warned that booming drilling in the shale oil fields of North Dakota and even south Texas could slow if U.S. prices drop below $80 a barrel.
Matt Pickard, consulting manager at Quest Offshore Resources said that the more expensive deepwater projects need oil prices of $75 to $85 a barrel to be economically viable.
How could we bring down the price of oil while making huge profit?
An oil price war would drive global warming people absolutely crazy.
Economics 101: The final price of any good (in this case: OIL) includes ALL costs of producing that good and bringing it to market. That would include the cost of materials, manufacturing, labor, taxes, marketing, etc..
Absolutely oil prices are based on the cost of drilling as a component of its final cost.
You are both off. The price of any good, absent non market externalities (eg. gov), is based on the cost of the marginal unit of product. If the price is higher than the min for the marginal producer then you get more producers, if the price drops, then some of those producers produce something else (or sometimes nothing). Part of the reason Oil is so expensive is that government makes production and transport more expensive, and tries to prevent new producers from entering the market.
A winning answer. All costs are reflected in market price. And the costs imposed upon energy companies in the form of regulations by the feds is no small component. I've tried to tell people here that market prices we pay is a complex calculation. Some want to blame speculators; others arbitrary prices set by oil firms. That just is not the way it is.
That would also include government interference in the marketplace whether that's vis regulatory costs, market manipulation (denying building of new refineries for example) and taxes.
You're introducing two additional economics concepts being the law of supply and demand, and competition.
If more manufacturers (in this case, oil producers, refiners, traders, marketers, etc..) see a profit in a marketplace, they will of course "jump in" to produce product at a price that (a)produces a profit and is (b) competitively priced. MOST of the time, competition lowers prices. This has a direct impact on the law of supply (increasing) and demand (increasing via lower costs to consumers, making product more affordable.)
In the case of the Oil market, we used to have more than 22 producers/major oil companies operating in this country prior to 1996. Today we have basically 5. When you have a marketplace with few competitors, each of which acts directly based on the actions of another (raising/lowering prices for example) you have what's called an OLIGOPOLY. The actions of one producer directly impact the actions of another and they follow suit.
You can also see effects of OLIGOPOLIES in the Airline Industry, Cable/Satellite Television, Wired Communications companies, and now in the Wireless industry. There are few competitors, all about the same price, with zero to no incentive to innovate and produce a product that consumers want at a competitive price that they can "steal away" from another producer.
Now to your point about government interference, YES, absolutely the Government interferes in the marketplace with regulations and other activities (taxation, fines, enforcement, etc..) and YES, the effects of those activities are reflected in the end price to the consumer. Whether that consumer is a refinery (taking in oil, producing gasoline, diesel, kerosene, etc..) a middle-market trader, speculator, or you and I as we go to the gas pumps to fill our vehicles at exhorbitant prices.
I would argue (as I suspect you would...) that the biggest cost component of a gallon of gasoline is GOVERNMENT and Government REGULATION and INTERFERENCE in the marketplace. We have 57 different and unique blends that the EPA mandates be sold in different parts of the country. Those 57 different blends of gasoline are transported over a pipeline system that was built 50 years ago, and meant to move three blends. That makes it exponentially more difficult to move gasoline around the country based on blend requirements, and yes, that impacts the cost to the end consumer!)
Don't know about the state you live in, but here in Illinois (sigh, yes, I live in this socialist hellhole) the cost of a single gallon of gasoline contains anywhere from 65 - 85 cents (or more, in Chicago) per gallon just in taxes, depending on where one purchases gas. BTW, thanks to EPA mandates, 5 different blends of gasoline are sold in this state. Think that affects the price per gallon? YOu bet it does.
Have to leave for church, back later...
Wall Street maven Byron Wien predicted oil would trade at $70 a barrel in 2013.
According to The American Oil & Gas Reporter’s annual Survey, for crude oil, 25.8% of independent oil producers would trim their drilling programs at a WTI spot price of $72 a barrel.
At $68 a barrel, 51.6% of respondents would cut drilling, while 67.7% would pull back at $64 a barrel. Those numbers go to 87.1% at $60 a barrel and 93.5% at $55 a barrel.
...where the price of oil must trade in order for energy companies to make a go of it in the oil sands and shale gas formations.
Thank you, still think an un-cartel-ed market would be better in the long run.
” Matt Pickard, consulting manager at Quest Offshore Resources said that the more expensive deepwater projects need oil prices of $75 to $85 a barrel to be economically viable.”
These projects, might be viable at a lower per barrel price if the per dollar value was higher.
Do need to accomplish more reading in this area.
Cheers
No, sir. It is you who is "off".
The price of any good is dependent completely on the willingness of consumers to pay it. Now, the "asking" price of the producer may well be what you state, but that's just a wish and a dream.
Consumers set prices -- not producers.
The best producers can hope for is that they can make a product for less than consumers are willing to pay.
No, no, and no.
The asking price of oil is based on those. The final price [selling price] is completely dependent on the consumers' willingness to pay it. That's why the price of oil sometimes drops -- people decide to use less of it at the current price.
If consumers, at some point, are unwilling to pay $75 to $85 a barrel for oil, the new production in America will become unprofitable. It happened before in 2001-2002.
The price of oil dropped -- not because drilling and production costs were reduced, but because the recession caused demand to drop. The drillers had no control whatsoever over the price; they were forced to shut down if their costs exceeded the new price.
The best a producer [of any product] can hope for is to produce a good for less than consumers are willing to pay. If producers could truly set prices, everyone would go into business for himself.
I think you and I are making two separate points.
The fact is, if it costs more to drill, refine, transport and market a product than the product commands on the market, then the manufacturer (in this case, oil company through refiner, transportation company and individual gas station owner) will stop selling that product, period. No company operates at a loss, at least not for very long, and stays in business.
If it costs $75-$85 per barrel just to drill for oil or operate the oil sands, and the market price for gasoline is $2/gallon, then it's simply not cost effective at today's technology for an American company to drill, refine, transport and market gasoline. The economics at the base cost per barrel won't work. In this scenario, the cost components from drill to refine to gas @ the pump just don't work in favor of making a profit. That's before any market price gets set via the law of supply and demand by the end consumer.
Now, let's examine the asking price of oil and what it's based on. That, by itself is what the "market may bear." Here again, if the market says the price of oil should be $40/bbl and it costs $75-$85/bbl to produce, several things happen to change the price: the supply goes down which if demand is static drives prices for oil up or producers stop drilling for and refining oil. Of course, both scenarios may also be true.
The price of oil dropped -- not because drilling and production costs were reduced, but because the recession caused demand to drop. The drillers had no control whatsoever over the price; they were forced to shut down if their costs exceeded the new price.
During the recession, the price of oil has dropped, however I'd argue not in line with how other prices dropped, or according to the lack of demand for the product. Yes, it's true wold-wide demand for oil dropped during the recession. Given the lack of producers and refiners world-wide (again, the OLIGOPOLY that exists in this space) what happened was more a reduction in supply to prop up the price.
That reduction in supply happened in the oil fields, and again at the refineries which produce gasoline. While we have a "glut" of oil sitting in Cushing OK (and you may think my point is moot because of it) the problem is that demand dropped more than the supply cuts. Even still, that kept prices high as refineries were squeezed by the high cost of oil and the declining prices for gasoline. Remember, Refineries have raw materials as input for their product, labor, transportation, etc.. costs just like everyone else. Because oil producers cut supply, costs to refiner's didn't drop as much as one would expect, while the demand for gasoline drove finished product (gas, diesel) down to end consumers.
Refineries were caught in the middle as their profits were squeezed as the crack-spread disappeared. They in turn had no alternative to either (a) shut down or (b) restrict supply to prop prices back up.
Guess which happened? I don't know about you, but I haven't seen gas prices dip below $3.50/gallon in about 3 years now. Today's price on the corner started at $3.99/gal this morning at 10am, and somehow dipped to $3.87 this afternoon. Tomorrow morning, it'll be $3.99 again as people fill up and go to work. Are those "market forces" at work, or is it pricing manipulation?
I'd argue we have pricing manipulation starting @ OPEC and continuing right down to the gas station on my corner that changes prices literally 3-5 times a day and the law of supply and demand has little if anything at this point to do with how prices are set. (OLIGOPOLIES.)
I'd also argue that in the early 90's when we had more than 22 different oil companies operating in this country, our energy prices were relatively low. Today we have 5 major producers in this country. Each knows what the other is doing to affect supply or pricing on a daily basis. One doesn't make a move supply or pricing wise without the other four knowing what's going on. That's not competition.
If we want lower energy prices, we need increased competition, and that means getting the Federal Government out of the way, reducing regulations and increasing competition for resources. That will drive technology innovation which will ultimately lower prices for all.
(Off my Economics 504 soapbox)
One last comment: I have several friends who work at the refineries in Romeoville, IL not far from where I live. That refinery has been operating at 70-75% capacity for the last four years. I've been told by same friends that's typical across the industry. That would indicate refining capacity is in fact being held back while we have a glut of oil supply in this country. Now why would that be, if for no other reason than to prop up the price per gallon being charged at the pump? The refineries have found that they can restrict supply to increase price, which makes up for the loss of revenue in the crack-spread that they've been used to. That's not the law of "supply and demand" in action, that's price manipulation/fixing by the OLIGOPOLY that exists in this market space.
Let’s have a look at the past.
In 1985, Ronald Reagan persuaded Saudi Arabia to rise oil production.
Between 1985 and 1990, Saudi Arabia increased oil production by 6 million barrels per day at a time when the world was using 60 million million barrels per day.
The price of oil collapsed. Oil prices went from $60 a barrel to $30 a barrel (Today’s Dollars).
Inflation-adjusted gas prices fell below $2 a gallon and stayed there for most of the rest of the 1980s and 1990s.
OPEC earned $200 billion per year between 1985 and 2002 versus $1 trillion in 2011 (Today’s Dollars).
The unemployment rate dropped, approaching 5% in 1989.
At the same, U.S. oil production started to drop because many drillings became unprofitable. And everybody stopped energy conservation.
So, between 1985 and 2002, U.S. oil production declined by 2.9 million barrels per day and U.S. oil imports rose by 6.2 million barrel per day.
So.
When oil is cheap, U.S. oil imports are up, U.S. oil production is down, unemployment rates drop and OPEC is earning far less money.
When oil is expensive, U.S. oil imports are down, U.S. oil production is up, unemployment rates rise and OPEC is earning a lot of money.
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