The new floor for oil prices is being set increasingly by the production cost of . . . unconventional liquids. A few decades ago, we could produce conventional oil profitably in the U.S. for under $15 a barrel. But those days are long gone for the U.S., and for most of the world (except a few old fields in places like Saudi Arabia). As every major oil company has admitted in the past few years, the age of easy and cheap oil has ended.
As the cheap oil from old mature fields is depleted, and we replace it with expensive new oil from unconventional sources, it forces the overall price of oil up. This is because oil prices are set at the margin, as are the prices of most commodities. The most expensive new barrel essentially sets the price for the lot.
Research by veteran petroleum economist Chris Skrebowski, along with analysts Steven Kopits and Robert Hirsch, details the new costs: $40 - $80 a barrel for a new barrel of production capacity in some OPEC countries; $70 - $90 a barrel for the Canadian tar sands and heavy oil from Venezuela’s Orinoco belt; and $70 - $80 a barrel for deepwater oil. Various sources suggest that a price of at least $80 is needed to sustain U.S. tight oil production.
Those are just the production costs, however. In order to pacify its population during the Arab Spring and pay for significant new infrastructure projects, Saudi Arabia has made enormous financial commitments in the past several years. The kingdom really needs $90 - $100 a barrel now to balance its budget. Other major exporters like Venezuela and Russia have similar budget-driven incentives to keep prices high.
Globally, Skrebowki estimates that it costs $80 - $110 to bring a new barrel of production capacity online. Research from IEA and others shows that the more marginal liquids like Arctic oil, gas-to-liquids, coal-to-liquids, and biofuels are toward the top end of that range.
[Nelder's] research suggests that $85 is really the comfortable global minimum. That’s the price now needed to break even in the Canadian tar sands, and it also seems to be roughly the level at which banks and major exploration companies are willing to commit the billions of dollars it takes to develop new projects.
Chris Nelder, "The Cost of New Oil Supply," SmartPlanet, April 18, 2002
See further Kate Mackenzie, "Marginal Oil Production Costs are Heading toward $100/barrel, Financial Times, May 2, 2012, quoting a report from Bernstein's energy analysts.
Tracking data from the 50 largest listed oil and gas producing companies globally (ex FSU) indicates that cash, production and unit costs in 2011 grew at a rate significantly faster than the 10 year average. Last year production costs increased 26% y-o-y, while the unit cost of production increased by 21% y-o-y to US$35.88/bbl. This is significantly higher than the longer term cost growth rates, highlighting continued cost pressures faced by the E&P industry as the incremental barrel continues to become more expensive to produce. The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth [Compound Annual Growth Rate]. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl. While we see near term downside to oil prices on weaker demand growth, the longer term outlook for higher oil prices continues to be supported by the rising costs of production.