[eXpat]

Very nice and juicy article:

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.

http://www.smartplanet.com/blog/energy-futurist/the-cost-of-new-oil-supply/468

[Pops]

This makes all the sense in the world to me. We're past the peak and just like Wile E Coyote, economic momentum alone is propelling us forward.

"Peak oil has been forecast since the beginning." and all the other slogans are the embodiment of the normalcy bias that makes humans continue to shuffle the chairs even as the waves break over their deck shoes.

As has been forecast for years, $100/bbl looks to be the point of pain where Americans start conserving. We are the "low-hanging fruit" of demand destruction – more oil has been made available by Americans parking the SUV than by the miracle new technology of fracking.

Cheney was wrong, our lifestyle is being negotiated as we speak. Not only can we "conserve" our way out of this problem, there is no other choice.


But, on topic... (and edited for clarity)
New tight oil costs a lot to bring online. I'd guess that once those wells are producing, the incremental costs aren't much higher than old conventional wells. That wouldn't be so much of a problem if they flowed lots of oil for a long time. Offshore wells seem designed to flow lots of oil for a short period to recoup costs. But the new tight oil wells don't provide much oil the first day and proceed to deplete to near nothing in a couple of years. New wells must be drilled continuously just to stay even, let alone hope to replace depleting conventional oil fields.


What we have is a drilling boom, not an oil boom.

[Lore]

And as I've been saying for sometime, you can't use increasingly expensive oil to obtain cheaper oil.

[SeaGypsy]

But, on topic...
New oil costs a lot to bring online although the incremental costs thereafter aren't as high – for the oil that actually flows anyway. That wouldn't be so much of a problem if they flowed lots of oil for a long time. The big problem is that new oil wells deplete faster than "old" conventional oil wells so they must be replaced very fast.


What we have is a drilling boom, not an oil boom.

True, plus the current drilling boom has one particularly weak leg, being based on a very short term exponential increase & improvement of pre-drill exploration. 20 years ago geologists used topographicals and site visits, very slow and laborious. The last few years/ decade or so, the world has been scanned from air, space and sea. Seismological, electro magnetic and geo- time reconstruction. All this exploration is now yielding it's fruit. Might be even 50 years of sub $250 oil. Woohoo!

[eXpat]

Venezuela agrees to that number, in fact, it seems to be established policy for them now:
Venezuela's PDVSA Sends Oil to Asia to Fetch Better Price

Venezuela, South America’s largest oil producer, curtails production to comply with its OPEC quota and keep oil prices from falling, Ramirez said. The country plans to produce an average of 3.13 million barrels a day of oil in 2012 and end the year with daily production capacity of 3.5 million barrels, said Ramirez, who is also the country’s oil and mining minister.

“We’re worried about stability in oil prices and working to construct a price floor of $100 a barrel. We see some OPEC countries producing more than their quotas,” Ramirez told reporters. “Rising inventories are a terrible signal that there is over production.”

The country’s oil export price fell 1 percent in the week ending April 13 to $113.85 from $115.01 the prior week.

http://www.bloomberg.com/news/2012-04-17/venezuela-s-pdvsa-sends-oil-to-asia-to-fetch-better-price.html
I wonder though, if it is Venezuelan policy alone, or maybe an agreement behind close doors within OPEC?

Over lunch a week ago, Hansen told me that “global spare capacity is approaching zero from a statistical standpoint,” and those conditions are the primary driver of the recent rise in oil prices.
Hansen is not an alarmist when it comes to energy, and doesn’t expect a return to the lines that snarled streets near gasoline stations during the 1973 oil crisis. His analysis is backed by a careful examination of the data.

One troubling statistic that the media largely ignores, according to Hansen, is the background depletion rate from existing oil wells, which Hansen conservatively pegged between 3% and 4%. This is the percent reduction in production from existing wells. With total world crude oil production now at 75 million barrels per day, the same wells will produce only 72 or 73 million next year. That 3%-4% depletion rate has to be made up for by new wells coming on line if world production is not to decline.

That problem, Hansen said, looms larger than the growth in demand. Chinese demand, for example, might grow by 10% next year, which is less than the 2-3 million barrels lost to depletion. “Everyone focuses on China,” he said, “and overlooks depletion which never takes a break like China may if its economy slows.”

“Even if there is spare capacity,” Hansen said, “There is still a problem.”

Hansen is skeptical about recent claims by the Saudis that they have as much as 25% spare capacity. If they had that much capacity, then Hansen said there is no reason why they wouldn’t have brought it on-line sooner.

But even if those spare capacity claims are true, one must consider the Saudi’s internal needs. Saudi Arabia is reserving a rapidly growing percentage of its oil production for internal consumption.
...
This year’s numbers are not influenced as much by commodities traders, because there is less volatility than in 2008, Hansen said.

The global economy will have trouble with oil prices above $125 per barrel, Hansen said. At the other end, the cost of production establishes a floor for oil prices. That cost ranges from around $80-$90 per barrel for Saudi Arabia to $100 for Russia. Those are the prices necessary to guarantee domestic stability, since both countries use oil revenue for political purposes; the variable cost of production is much lower.

“That’s not a big window,” Hansen said, “and it’s getting tighter, because the floor is going up as the cost of exploration, extraction and production of oil goes up.” When prices go outside of that zone, “someone suffers,” he said.

http://articles.businessinsider.com/2012-04-17/markets/31353721_1_oil-prices-crude-oil-oil-wells#ixzz1sav4FWwt

[Daniel_Plainview]

New tight oil costs a lot to bring online. ... New wells must be drilled continuously just to stay even, let alone hope to replace depleting conventional oil fields. ...

The "true costs" of drilling, extracting, and producing crappy oil (i.e., low-EROEI oil) will never be known under the current central-bank- controlled economies, because artificially low interest rates combined with the unlimited infusion of "hot" money will completely obfuscate the economic realities and actual costs of capital ... for now.

We're past the peak and just like Wile E Coyote, economic momentum alone is propelling us forward.

When reality finally hits such that the central-bank-propagated illusions finally dissolve, then this "Wile E Coyote analogy" will prove to be SPOT ON.

Today, right now, we are witnessing the very moment when the illusions of central bank intervention confront reality (gravity).

[vtsnowedin]

[]it seems that all modern oil production is subsidized in some fashion. We in the United States kept the price low for years, merely transferred the costs to foreign-war taxes. Take tar sands; the monster trucks, factories, highways, pipelines, etc. were all built and maintained when petroleum was cheap. That cheap-oil subsidy is rusting away as we speak. Entropy.

.

I have to disagree with this point. The factories that make monster trucks and the other mining and oil production equipment are all still humming along building replacement machinery as fast as they wear out what is on line. The cost of new state of the art equipment brought on site sets the budget. Old depreciated equipment is used to the end of it's life cycle of course but as soon as new equipment can do more, for less total cost, the old gets scrapped. I'm on a road building job at present. The contractor is running a fleet of trucks and equipment that averages about seven years old but the oldest units are cranes that have a long life span and the newest are brand new GPS guided dozers and motor graders that have the advantage of putting the material in exactly the right location with one pass vs three or four by traditional methods.
Also economies of scale are real. In one shift a 550 Horse Power machine can do the work lesser machines would take a week to accomplish and use less fuel in total per unit of work accomplished.

[The Practician]

[]it seems that all modern oil production is subsidized in some fashion. We in the United States kept the price low for years, merely transferred the costs to foreign-war taxes. Take tar sands; the monster trucks, factories, highways, pipelines, etc. were all built and maintained when petroleum was cheap. That cheap-oil subsidy is rusting away as we speak. Entropy.

.

I have to disagree with this point. The factories that make monster trucks and the other mining and oil production equipment are all still humming along building replacement machinery as fast as they wear out what is on line. The cost of new state of the art equipment brought on site sets the budget. Old depreciated equipment is used to the end of it's life cycle of course but as soon as new equipment can do more, for less total cost, the old gets scrapped. I'm on a road building job at present. The contractor is running a fleet of trucks and equipment that averages about seven years old but the oldest units are cranes that have a long life span and the newest are brand new GPS guided dozers and motor graders that have the advantage of putting the material in exactly the right location with one pass vs three or four by traditional methods.
Also economies of scale are real. In one shift a 550 Horse Power machine can do the work lesser machines would take a week to accomplish and use less fuel in total per unit of work accomplished.

The process is a little slower and harder to detect than pstarr is letting on, but I think his analysis is correct. Sure, there is new equipment getting built and infrastructure spending is still happening, but its getting less and less all the time, and more expensive to boot.

[eXpat]

100 is nice for everybody (producers that is)
Saudi finmin: $100 is good oil price for all -TV

PRAGUE (Reuters) – An oil price of $100 per barrel would provide the right balance for both consumers and producers, Saudi Arabian Finance Minister Ibrahim Alassaf said in an interview for the public Czech Television aired on Thursday.

Global benchmark Brent blend was valued on Wednesday at just below $120 a barrel.

“The target of $100 is good both for producers, consumers and the oil industry. I think this is a price that is good for everyone. So this is our target,” Alassaf said.

Saudi Oil Minister Ali al-Naimi in January identified $100 a barrel as a favourable oil price for an average of crudes worldwide but since then prices have risen sharply.

Alassaf said there was no fundamental imbalance of supply and demand on the oil market and prices had been driven up by speculators and tensions in international relations.

Alassaf added Saudi Arabia would not buy European sovereign debt directly, but is helping via providing funds to the International Monetary Fund (IMF).

http://www.firstpost.com/fwire/saudi-finmin-100-is-good-oil-price-for-all-tv-290260.html

[eXpat]

Oil-Rich Gulf Countries new needs, make almost sure that prices will not go down.

Gulf States Keep Oil Dollars Home

Booming oil prices are flooding Arab countries with money, but where the lion's share of that wealth would once have been pumped into the world's financial markets, much of it is now being spent at home.

Gulf states are embarking on their biggest spending spree on record as they lavish funds on domestic projects—from new housing and hospitals to mosque restoration and job creation—largely as a defensive response to the Arab Spring uprisings that toppled other Middle East governments last year. Government outlays in the region are set to reach $488.6 billion this year, according to recent Institute of International Finance estimates, up 35% from 2009's figure.
The domestic focus hasn't yet eaten away at the region's external investments—net foreign assets in the Gulf region are expected to rise by around $300 billion this year alone—but the domestic focus has meant less oil money is being funneled into global capital markets than otherwise might have been. New patterns of spending are also pushing government budgets through the roof and sending money once set aside for things like increases to oil production capacity and military upgrades to social projects instead.
...
The jump in domestic outlays is an acceleration of what had been a decade-long shift toward rebuilding the region's infrastructure. All told, Gulf countries have an estimated $1.8 trillion of capital investments planned or under way over the next 15 years. "The Arab Spring kicked it into high gear as all countries stepped up spending," said Rachel Ziemba, an economist at Roubini Global Economics.

The shift is especially notable in Saudi Arabia, the world's biggest oil producer and the region's most populous country. Attempting to head off perceived threats to the political and social order, Saudi's King Abdullah last March announced about $70.9 billion of outlays on housing and health in the kingdom, as well as setting a minimum wage and giving bonuses to government employees.

http://online.wsj.com/article/SB10001424052702303990604577367920842942292.html?grcc=f4b18a518e88f951d8c889f4e0457b13Z0ZhpgeZ1Z727Z200Z124Z1&mod=WSJ_hps_sections_markets

[sweetyang]

I wonder why some people would be betting the futures market is going to be high?
____________________________________________________________________

[joewp]

GPS-guided dozers. cool. I guess there are still some efficiencies to wring out of the system. But decline will be relentless once we pass over the peak and plateau. Here is sincerely hoping we have a new system in place by then.

Yeah, but efficiencies just bring the point of collapse closer. As efficiency increases, the point of diminishing returns gets closer. Like the 550 horsepower machine doing a week's work in one shift is a great return, after you implement that, a 1100 horsepower machine can only cut that time to 6 hours, not so good. The returns per unit of extra effort diminish until you reach the point where extra effort is required just to maintain production.

And then extra effort is required to slow production's decline.

That floor will keep rising, baby!