17 January 2012

Price of Oil: Economic Breakeven vs. Political Breakeven Prices

The following table provided by the Bank of Kuwait gathers current reported break-even prices of major oil producing nations:
Oil Break-Even Prices
Saudi Arabia30
Canada's oil sands33

Based on the formula, profitability of these countries' oil operations are in order:

Profitability at $100/barrel oil
NationBreak-Even PriceProfitability
Saudi Arabia30233%
Canada's oil sands33203%

The tables above present rough estimates for economic profitability for oil production in various nations. Such numbers create a "price floor" of sorts for oil markets. But a lot more is involved than mere economic profitability. When entire nations base their budgets upon oil & gas income, another type of "breakeven" enters the4 picture: political breakeven.
Here you can see the political breakeven prices, which countries must receive for their oil in order to meet their fiscal budgetary demands. The political breakeven prices are rising almost every year now. Several oil producing nations are now dependent upon $100 per barrel oil prices now, and others are pushing to keep prices at that level just to maintain a safety margin for their governments.

Fareed Zakaria used the above logic in his predictions that oil prices must stay high -- that they cannot possibly fall much below current market prices.

But he and many others of like mind are ignoring the shadow side of global energy markets: shaky demand caused by the threatened stumbling of economies in Europe, the US, and increasingly, China. If global demand crashes, political breakeven becomes essentially irrelevant.

Peak oil theorists have generally neglected the demand side of the equation, always insisting that demand will grow exponentially, no matter what. We may soon discover whether they were right, as political peak oil threatens to show its ugly nethers yet again.

The whole house of cards is currently built upon a trumped-up demand, which originates largely in one specific country:
If something happens to collapse the bubble of demand in that country, a cascading collapse of commodities demand could very well set in around the globe. Interesting times, as they say.

More: Marginal oil, with its greater risks and higher cost of production, will exert more influence on oil prices as it moves to becoming 10% of global supply by 2035.

Of course, improved technologies will make marginal oil more affordable over time -- to the point that "marginal oil" will probably become more profitable than conventional oil in many of the oil states that have allowed their oil field infrastructure to decay, without investment or upkeep.

Week ending close of oil price at NYMX from 2006 to present

Making sense of such a fluctuating trend requires a lot of background information, along with a finely tuned intuitive sense. Several forces are at work: political, speculative, technological, supply :: demand economics, demographic trends, human nature, and even criminal interests. The balance is subject to rapid and catastrophic shifts.

Anyone who makes confident predictions in such an environment has either vested interests, solid gold insider information, or a declining mentation.

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Blogger Luke J. Terry said...

That's three year old information. Due to inflation and resource depletion, those numbers may be ~20% higher today.

Still, with 2x-4x markup, your point stands.

Tuesday, 17 January, 2012  
Blogger al fin said...

Yes, thanks.

Gulf state leaders complain about the active devaluation of the US dollar, as one reason why breakeven costs continue to rise.

The underlying concepts are the main thing to keep in mind, as the particular numbers tend to change quickly.

Rather than throwing out an automatic "markup" value, your best bet would be to start with new numbers, making sure they were consistent with all other expectations. Government statistics are a few steps down the ladder from blatant lies.

I had meant to deal more with the impact of "marginal oils" such as oil sands, shale, offshore, GTL, CTL, etc. That is one category where new technology can bring about price change in the opposite direction.

Tuesday, 17 January, 2012  

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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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