Oil bonanza? Maybe ... A return to $2/gallon gas? Forget it
For consumers, sentiment about prices generally follows two simple rules: more expensive and hard to get = bad, cheap and abundant = good.
In that context, all the new oil “wealth” coming from sources like Canada’s oil sands, the US’s corn-based biofuels and, potentially, gas- and coal-to-liquid technologies definitely falls under the “bad” column.
That’s because of the high cost to produce such non-conventional sources of liquid fuel … which have been the only sources to grow significantly, while production of conventional crude has been basically flat since 2005.
While detailed and verifiable data on production costs can be hard to come by, one estimate puts the marginal cost of production for, say, the bituminous deposits in Alberta at around $85 per barrel. Coal-to-liquids? A different estimate says it’s worthwhile when oil is between $80 and $120 a barrel.
(Note: The marginal cost of production helps define “at what point an organization can achieve economies of scale,” according to Investopia.)
In other words, our “bonanza” of new oil sources won’t be bringing a return to the days of $30 per barrel oil and $1.25 per gallon gas.
So what are the estimated marginal costs to produce different types of liquid fuels? Here’s the list, based on figures from the research and analyst firms IHS CERA and LCMCommodities Research:
- Saudi Arabian oil – Around $22 per barrel (see added notes below)
- Other OPEC conventional crude – Over $25 per barrel
- Non-OPEC conventional crude – Around $30 per barrel
- UK North Sea oil – More than $55 per barrel
- Conventional crude produced through enhanced oil recovery – A little over $60 per barrel
- US Gulf of Mexico deep water oil – Around $65 per barrel
- Nigerian deep water oil – Around $78 per barrel
- Canada oil sands – Around $85 per barrel
- Gas-to-liquids — More than $90 per barrel
- Other unconventional sources in North and South America — Around $95 per barrel
While Saudi Arabian oil still looks like a bargain from a production-cost standpoint alone, the reality is that the Kingdom needs a much higher price for its oil. As energy writer Chris Nelder notes, the Saudis need to generate enough revenue from their oil to support the massive social and infrastructure programs adopted in the wake of the Arab Spring. Chris Skrebowski, a trustee with the Oil Depletion Analysis Centre, pegs the Saudis’ required price floor at $90 to $100 per barrel).
One more note: the estimates here are for current production costs. Bringing on new supplies from any of these sources are likely to carry even higher price-tags going into the near future.
For consumers, sentiment about
prices generally follows two simple
rules: more expensive and hard to get
= bad, cheap and abundant = good.
In that context, all the new oil “wealth”
coming from sources like Canada’s
oil sands, the US’s corn-based
biofuels and, potentially, gas- and
coal-to-liquid technologies definitely
falls under the “bad” column.
That’s because of the high cost to
produce such non-conventional
sources of liquid fuel … which have
been the only sources to grow
significantly, while production of
conventional crude has been basically
flat since 2005
(http://www.theglobalview.com/scientists-
warn-flat-oil-production-threatens-
world-economy_21333.html).
While detailed and verifiable data on
production costs can be hard to come
by, one estimate puts the marginal
cost of production for, say, the
bituminous deposits in Alberta at
around $85 per barrel
(http://www.theoildrum.com/node/724
6). Coal-to-liquids? A different
estimate says it’s worthwhile when oil
is between $80 and $120 a barrel
(http://www.theoildrum.com/node/901
5).
(Note: The marginal cost of
production helps define “at what point
an organization can achieve
economies of scale,” according to
Investopia.)
(http://www.investopedia.com/terms/m
/marginalcostofproduction.asp#axzz1
uVN7qEQK)
In other words, our “bonanza” of new
oil sources won’t be bringing a return
to the days of $30 per barrel oil and
$1.25 per gallon gas.
So what are the estimated marginal
costs to produce different types of
liquid fuels? Here’s the list, based on
figures from the research and analyst
firms IHS CERA and
LCMCommodities Research:
Saudi Arabian oil — Around $22 per
barrel
Other OPEC conventional crude —
Over $25 per barrel
Non-OPEC conventional crude —
Around $30 per barrel
UK North Sea oil — More than $55 per
barrel
Conventional crude produced through
enhanced oil recovery — A little over
$60 per barrel
US Gulf of Mexico deep water oil —
Around $65 per barrel
Nigerian deep water oil — Around $78
per barrel
Canada oil sands – Around $85 per
barrel
Gas-to-liquids — More than $90 per
barrel
Other unconventional sources in North
and South America — Around $95 per
barrel
While Saudi Arabian oil still looks like
a bargain from a production-cost
standpoint alone, the reality is that the
Kingdom needs a much higher price
for its oil. As energy writer Chris
Nelder notes, the Saudis need to
generate enough revenue from their
oil to support the massive social and
infrastructure programs adopted in
the wake of the Arab Spring
(http://www.smartplanet.com/blog/ener
gy-futurist/the-cost-of-new-oil-
supply/468).
Chris Skrebowski, a trustee with the
Oil Depletion Analysis Centre, pegs
the Saudis’ needed price floor at $90
to $100 per barrel) (http://www.odac-
info.org/newsletter/2011/09/16)
One more note: the estimates here
are for current production costs.
Bringing on new supplies from any of
these sources will probably carry even
higher pricetags going into the near
future.
