Cost of oil poses problems for the economy again
Shawkat Hammoudeh
Issue date: 7/3/09 Section: Ed-Op
Exploration opportunities have also been on the decline for the last 40 years. There is now a renewed interest in exploring for oil in the Arctic which is the most difficult and most expensive area on the surface of the earth to extract oil from. The marginal cost for this area would be much higher than the current cost of extracting the marginal oil in the difficult areas of deep waters which ranges $60 to $80 a barrel. This means the current oil prices are well justified and the era of cheap oil is gone, even when the world economy is going through a great recession like now. A corollary to low exploration is heavy depletion in many mature oil fields. There is natural depletion in oil fields in Angola, Brazil, Nigeria, the North Sea, Mexico, Russia and others. The rate could reach nine percent per year if no new discoveries are added and no investments are made, according to IEA.
On the production side, non-PEC production increases at an anemic rate at best, if at all. In Mexico, for example, oil production declined by nine percent, and some of its major fields dropped by 30 percent, year after year. The decline of Cantarell, one of the four "super-giant" oil fields in the world, has accelerated to 38 percent per year. At the current rate, Mexico's oil exports will cease altogether in seven years or less. There are also the forces of potential supply destruction which are now working underneath the surface. There have been global shut-ins in small oil fields which do break even at $40 a barrel. The shut-ins increase as the oil price decreases.
On the inventory side, we witness the start of supply destruction in the form of declines in crude stocks, both at sea and on land. The IEA reports that global floating oil storage at sea dropped to about 80 million barrels at the end of May, the equivalent of about one million barrels per day over that month. The Department of Energy/Energy Information Administration also reported that the U.S. oil stocks on land dropped significantly.
On the production side, non-PEC production increases at an anemic rate at best, if at all. In Mexico, for example, oil production declined by nine percent, and some of its major fields dropped by 30 percent, year after year. The decline of Cantarell, one of the four "super-giant" oil fields in the world, has accelerated to 38 percent per year. At the current rate, Mexico's oil exports will cease altogether in seven years or less. There are also the forces of potential supply destruction which are now working underneath the surface. There have been global shut-ins in small oil fields which do break even at $40 a barrel. The shut-ins increase as the oil price decreases.
On the inventory side, we witness the start of supply destruction in the form of declines in crude stocks, both at sea and on land. The IEA reports that global floating oil storage at sea dropped to about 80 million barrels at the end of May, the equivalent of about one million barrels per day over that month. The Department of Energy/Energy Information Administration also reported that the U.S. oil stocks on land dropped significantly.
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