Tuesday, January 6, 2015

Oil - how low can you go?

As Ronald W Cotterill has written in his letter to the Financial Times:

Sir, Coverage of the oil price bust is missing a critical insight. Full costs for shale oil are around $50 per barrel, and full cost for the tar sands and most deep water oil are even higher. Yet, as prices drop the supply glut worsens.This is an example of the overproduction trap that commodities with high sunk (fixed) costs face. As long as the price of oil is above a company’s short-run variable cost of production, it can make a contribution to covering its sunk costs. Rather than cut production because price is below full cost, it will increase production to reduce its losses. Prices drop even more.The focus on the reduction in drilling of new wells, which comes when price is forecast to be below full long-run cost, is misguided if one seeks to determine when the oversupply of oil will end. Research on the short-run variable cost of oil production by various producers and countries is needed to identify the price bottom.Ronald W CotterillEmeritus Professor of Agricultural and Resource Economics,University of Connecticut, US
(Bold emphasis added)

Don't bottom feed yet if you are an investor, keep in mind that crude oil still can still lose 50% of its value from today's closing
Breakeven for major projects
Estimated global oil and extraction costs (Source: Joseph Freeman Jones)
Comparing Oil Patch Costs, Canada vs United States
History of crude oil prices