Last week when I was writing about the oil price, I had a look around for a neat graphic that showed the various break-even points for global oil producers. I couldn’t find one at the time, but the Financial Times have since compiled one. Here’s a graph showing the cost of production for various regions:
Today the WTI oil price stands at $55.91, which means those on the far right of the graph aren’t making any money. They tend to be the unconventional sources of oil, shale and tar sands. Saudi Arabia on the other hand, can produce oil very cheaply.
The lower the oil price drops, the larger the section of global oil production that isn’t breaking even. And the longer prices stay down, the more investment gets pulled, leaving a potential shortfall in supply in the future.
The Earthbound Report 
Two points. For projects operational or close they will carry on even if it’s under break even since some money to lower your losses is better than none.
Secondly while investment might fall, when the price goes up (because of the decline in new production or other reasons) then investment will go up to cash in on the higher prices. I don’t really see what the problem is. There is no set price oil ‘should’ be.
Personally I’m very much enjoying watching the governments of Russia, Venezuela and Iran go bust.
Yes, and the fiscal break-evens for governments is an interesting graph in itself. The Russian government needs those high oil prices or it will hit a major crisis – which almost makes the whole situation look engineered, in fact.
There is no ‘correct’ price for oil, as you say. But if you’re an oil company trying to finance your next project, how do you know what’s going to be viable in two or three years time when it comes online? If you can’t tell if it’s going to be profitable or not, you’re likely to pause or pull the plug on expanding shale or tar sands operations.
That’s the problem – those cancelled projects, plus the depletion from other sources, means the risk of a shortfall in future. That in turn means an oil price spike, and potentially recession.
The FT article suggests that projects equivalent to 1.5 million barrels a day are at risk for 2015, and a million a day for 2016.
“The lower the oil price drops, the larger the section of global oil production that isn’t breaking even. And the longer prices stay down, the more investment gets pulled, leaving a potential shortfall in supply in the future.”
That would be a desirable consequence, but no, with accounting flawed, central banks borrow at near zero rates, throwing money at the fossile fuel sector embedded in the public sector(central banks), this can go on, mere business as usual.
If a liability(fossile fuel energy) is recognised as an asset, the same thing goes for the defense industry, another glutton for the elites to convert into real-world wealth as they pritty-picky it: mansions, jets, festuvian suthering in the now, this can go on…admittedly not forever, but the dumbstruck elites seem confident or at a loss for asserting reality, probably both, unable to speculate further then the short-term.
There is a time-proven logic to it, better cliff the ship then change the captain.
Money in itself has no value, whether bit-coins or dollars, it refers to value, either as asserted by reality, the cost of fossile energy is extinction, or as in the ongoing human logic, asserting the make believe of writing it of in exchange for relative comforts for the elites, second rowing the decay and peril for the masses of human submissifs, and ultimately the planet.
There are two mega tendencies here, the elites versus the masses, inequality feeding on itself, and the zero-sum imperialistic strategies in economics and politics pitching the elites of somewhere to their competitors with the same tools of nowhere.
The humbelest take on this and well shown in how the accounting goes with regard to fossile fuels: our elites, whether called democratic or autoritarian, are dumbstruck, paralised by ignorance and emotionally incapable of assuming clear-headed thinking. The mandate they have is to apply anesthesics to the masses as long as the situation allows. Humanity is playing the end game. Elites alike.
Not sure – the elites are also shareholders in oil companies, and they would rather not see money invested with no guarantee of return.
The elites ‘invest’ money they get from the central banks at no interest rates to keep the “religious belief” of the many intact that depth globally can exceed assets, that accounting can be adjusted indefinitely, not as you might think because it shows in the ledger, but by showing up in futilities as climate change and streets out of control. Important, before they invest though, they shift these burdens of capital to your pension fund, your university, the company you work for so they can somehow hold up the make believe of the scheme to the street. The elites have no stake in the stock markets, other then what they get out of them manipulating them, amply to convert into hard assets.
The elites “cash in” in bonusses, commisions, pay-outs which they immediately convert in hard assets, houses, mansions, land and as a concession to Rome, a lavish unsustainable lifestyle. They have no stake in the “markets”. In inner circles they laugh at such a thing as “markets” since the eighties on. Bankers, political power mongers, industrial capitalists play ball, not against each other, but complicitely position themselves continuously within the power nucleus.
Back to petrols and anything else that digitises in stock or bond. As long as John Doe, well informed about how economics “work” up to the language it applies, “plumber” like, that you use so well, and the comments perspire, will leave greedy-and-ignorant, in the “hope, desire, drift” “to get some scraps” individuals around, the power-status will not change.
What is the real dynamic? Since now half a century, blatantly, the masses are manipulated, at the cost of a planet, and if the planet burps, as it seems to do, elites being confident that the burping is going to be in the face of these ignonimous masses. All well, they have no utility any longer, not as consumers, nor producers, the real assets now are water, land, air, and to convert them, minimal mercenary forces, and the easy one, machines. That will do. It is touching to see how make belief, a religion in itself as the world economy is, does the same to the elites as to the individual that is part of nothing. Ignorance floats in our world, the language of ignorance is the economic speak in itself, where collision in terms is built in.
Words indeed are no tools to explain. Do hope to spark some wrap-around at your side of the theoretical economics you suppose lie under the global realities. Such as money, stock, bonds being not an asset in itself but an expression of real assets and real liabilities. At least, they should be, not in economics speak, but in reality, their sum cannot be but zero per definition, and that is math.
You sure this wasn’t written by a computer?
Think a day ahead and count till three… consider the next ten-tousand years and a context of planetary scale, and see where your argument is heading: irrelevancy. Humanity is trapped within earth, start thinking inclusively, measure outcome not to money, it’s abberation of ledgering it, but to quality of life, and at the low end survival. Russia is not the game, last time on the map, it seemed embedded within the global confine.
Jeremy thank you for the enlightening chart.
m.
I’d say I’m with you if I understand most of what you (or your computer envisaged). What is the fossil-fuel divestment campaign about other than to drive fossil fuel investment toward sustainable energy — an extraordinary benefit to current and future generations.
Collapsing extraction industries? Bring it on. But this is a short-lived market manipulation unless… conservation and global recession produce a newer paradigm.
Of course markets will be unstable. Stressed, petroleum dependent governments will exhibit greater repression and there will be unintended consequences and more difficulties. Is this not the disruption the world needs?
We might remember the extraordinary decision of Winston Churchill when First Lord of the Admiralty, converting the British Navy from coal to oil — an expensive but ultimately vital decision for defense.
That kind of vision to abandon a losing strategy is the path to prosper in a no less distant future.
The hour is very late.
to J., as to machine language, no it was the mono-processor me.
Your intentions are genuine, you are one of the good guys, you are of the generation that should be concerned.
The point my processing is trying to make is that the expression in economical terms of what the fossil fuel industry represents is worthless, the accounting behind it is a cheat.
Unfortunately whatever the numbers of divestment might show, they will be meaningless. The game of markets, theoretical economics, the sampling of statistics, the reading of dynamics in the global economy indeed should be done by black-box computers that cannot be manipulated, the algorithms available to all capable networks of individuals and interested to keep up with bugs or flaws.
Bit-coins the digital money as it’s expression and it’s block-chain algorithm is the suggestion here.
No intermediates in the assessments and translation of physical digging, pumping, franking, scraping and much more importantly the mess of digitizing the physical phenomenon in numbers, in the case of fossil fuels, as one more, would sanitize part of the burk of futures and stock, banks and political mercenary toil a-la tonY blurR, and cameroN today.
Since half a century language, information thus, ultimately the inside of your head is manipulated, not primitively in one-layered policing and war, Hitlerian propaganda, but sophisticated mental manipulation in method and message. Nowhere is there worse to be seen as in the “economics” speak and it’s “peering” system.
In short: numbers whether of invest or divest mean nothing, they hide any decision, the systems, workflows and individuals involved, at the glory of any real assessment: we consume too much as humans, we shift the burden to the masses as for the elites, we are too many, there is no desire to include the planet in conceptual thinking, there are short-term concerns in any sub-group that try to suspend survival by shifting the burden to the other human subgroup or tribe, zero-sum on all levels. Your petrol, my petrol, it does not matter much, but indeed it is a perfect example how to enter the head and believe system of the global streets one better then arena sports.
Winny Churchill has made many wry decisions indeed, at the least they were timely in a moment of history where the stakes were less then global, and opportunistic meant confinability to the continent and local seas.
My sincere respect for your work as a public spokesman, hope your blog will stand the test of shame.
Shale changes the economics of the oil industry a bit because the wells only last a year or so which means in a situation like this it is possible to cut investment rapidly. This is compared to traditional large oil wells where you were looking at years so it was worth looking to ride out dips.
The flipside is that shale wells only take a week or so to drill so investment/production can be more rapidly ramped up.
It makes the market more flexible which is good for smoothing peaks and troughs.
The Guardian had a graphic which was not in its online addition. This was sourced to Wood Mackenzie. This showed the oil price that various highly oil dependent economies needed it was way way higher. Even at the oil price then only Kuwait was at break-even. This does suggest the fall will be temporary depending on why OPEC are pumping so much. On the the investment there are indications from BP and the North Sea that the lower price is hitting investment. http://www.theoillamp.co.uk/?p=4942
Like this one?