The Global View

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

(https://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.