Marginal Oil Production Cost Nearing $92 Per Barrel  

Posted by Big Gav in ,

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?

3 comments

Anonymous   says 8:08 AM

I fear this is a direct result of the nearly invisible problem of diminishing energy return on remaining oil supplies. More energy, money, equipment and time are necessary to effectively use the remaining oil. This is directly reflected as increasing price. I thought this wouldn't start in earnest for the next 15 years. I may have been optimistic.

Thanks, Gav. This was originally published by FT on May 2: FT Alphaville » Marginal oil production costs are heading towards $100/barrel. Rather sobering conclusions, it's a phenomenon that's been happening for the last decade, too, but few seems cognizant of the ramifications.

Thanks KLT.

The FuturePundit piece linked to the FT blog post.

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