Oil production takeaways

We had 16 weekly fuel price adjustments in the period beginning July, during which we only had about four instances when prices held steady or adjusted downwards.

A notable adjustment was the P1 increase in the week of August 28. Four successive weekly price increases followed and culminated in the jump of gasoline prices to the peak of P47.00 per liter in the week of September 25.

This seemingly inexorable rise in gasoline prices, which again picked up last week, was the result of the effort of Organization of Petroleum Exporting Countries’ (Opec) strategic players to “rebalance” global oil supply and demand. By doing so, the price of oil has managed to stay at the $50 per barrel level.

Fret no more, according to a recent review on oil prices. The general upward trend may soon reach its peak. The aggressive stance of non-Opec countries to pump out their oil and the weak alliance of Opec itself to control the balance of global supply and demand will do the job. You could expect this to happen by next year.

Ultra low cost producers

Except for a few, oil producing countries in the world watched in horror when the price almost fell to $20 per barrel in 2016. “These few” can, in fact, still make a “tidy profit” at such price level.

It supposedly took Saudi Arabia less than $9 to produce a barrel of oil in 2016.

Oil production is mainly affected—and thus determined—by four cost factors: capital spending, production costs, administrative and transportation costs and gross taxes.

For Saudi Arabia, its capital cost was only at “$3.50 per barrel.” This already covered investments in drilling new wells and procurement of necessary equipment.

Since its vast oil reserves are also proximately located and found near the ground surface, the production cost or “cost to draw the oil out of the ground by Saudi Arabia was only $3 a barrel.”

Oil production there is also tax-exempt, while administrative and transportation cost is at $2.49 per barrel.

Saudi Arabia, therefore, produced a barrel of oil for $8.99 in 2016.

Iran and Iraq came close, producing a barrel at $9.08 and $10.57, respectively.

Some of these oil-producing countries were also winners at the price regimen of $50 a barrel. The “average cash costs per barrel” last year were reported as follows: $19.21 for Russia; $19.21 for Indonesia; $20.99 for US nonshale and $23.35 for shale; $21.31 for Norway; $26.64 for Canada; $27.62 for Venezuela; $28.99 for Nigeria; $34.99 for Brazil; and $44.33 for the United Kingdom.

As reported, too, Norway and the UK could even have lowered costs further because they have large production bases like Saudi Arabia. But since these were offshore, about half of their total costs to produce a barrel was attributed to capital spending. In their offshore operation, “they need to build large offshore production platforms that require capex of $13.76 and $22.67 a barrel, respectively.”

Canada also has it good. However, because oil sands make up the bulk of output, it has to “produce oil through a process that burns natural gas to make steam or with large mining shovels and trucks to dig the oil sands of the ground,” bringing up “production cost to $11.56 a barrel.”

The report also noted that if Russia didn’t have to pay taxes, “its cash cost for oil would decline from $19.21 to $10.77 per barrel.”

Bottom line spin

What could further undermine the jump in oil prices in the future are the advances in shale drilling technology. Note that America was able to pump so much oil at one time to overtake Saudi Arabia as the world’s largest producer. This development also caused prices to crash. Shale producers also became more efficient, which could mean a significant reduction in costs.

The adoption of electric vehicles in many parts of the world could also have consequences, including oil prices crashing to $10 a barrel.