In July, 2014, the price of oil started to decline rapidly, due to the boom in US shale production and increased production from Saudi Arabia.
Saudi Arabia, in order to regain market share from US shale producers, started producing close to their full capacity. They realized by putting more oil out into the marketplace, they could push oil prices below a certain dollar per barrel and the high production cost projects worldwide, including a large number of US shale projects, would have to halt production. It’s important to note that Saudi Arabia’s cost of production is very low compared to most of the other major oil producing countries.
There are many types of oil projects occurring around the world. There are high production cost projects, such as the tar sands in Canada, which involve expensive extraction and post-extraction refining techniques to bring the product to market. On the opposite end of the spectrum, there are low production cost projects. One example of a low cost projects would be blanket sand formations in East Texas, where the oil that comes out of the ground is less expensive to produce and needs very little in the way of refining to bring the product to market. Each type of project brings with it a cost of production. High production cost projects may need as much as $75 to $85 per barrel to be profitable. Low production cost projects may need as little as $15 to $20 per barrel to be profitable.
Most of the high production cost projects, including many of the US shale projects, have now been shut down. The current market price for a barrel of oil is about $60. It seems like everyone these days has a different opinion on where oil prices will go from here. What everyone can agree on is this, if demand once again outpaces supply and there’s no additional supplies coming from high production cost projects to help meet the demand, oil prices could increase significantly until high production cost projects can get back online. High production cost projects can take a year or more to return to full production.
No one knows exactly what the future will hold. One thing is for sure, it will be very interesting to see what happens. Stay tuned!