OIL - More need, higher price?

Question

As the consumption and need for oil increases, why does the cost per barrel increase also? Is this just a case of 'you need it, so we charge what we want', or is there another technical reason for higher prices for higher requirement/need?

Answer 1

It's about supply & demand,plus speculation.That's what Capitalism is all about.You'll just have to grin & bear it.

Answer 2

There are technical reasons why some oils cost more to produce and bring to market than others, but for the most part the oil that we're all using today costs less than $50 per barrel to produce....far less than today's market price.

Consider some of the technical issues which drive "production" costs:

-- Oil Quality:  Is it a light crude or heavy crude?  Heavy crude has less of the light ends which make up gasoline, and requires additional refining to make anything of value out of it.  Unless, of course, you only want asphalt.  Is the oil sweet or sour?  Expensive metallurgies are required to safely deal with the highly corrosive poisonous gas, H2S, which is found in sour crude.

-- Depth:  From what depth does the oil come, and is it on-shore or offhsore?  Shallow wells of 1000' or so in a developed onshore oil province might cost $100,000 to drill.  An exploration well in 7000' of water offshore in the Gulf of Mexico, drilled to a total depth of 25,000 feet might cost $50,000,000 to drill.

-- Location:  Is the production located conveniently to the refinery and market where it will go?  Or does it have to be shipped through a myriad of pipelines, rail cars, and tankers to reach it's final destination?  Each link in the transportation process adds time, cost and complexity.  Some locations have shipping costs of $10/bbl or more.

-- Production Method:  Does the oil flow out of the well naturally, or are mechanical means necessary to pump it out of the ground?  Further, does the oil enter the wellbore because of natural reservoir pressure, or does it have to be pushed into the production well using nearby wells which inject water, natural gas, or steam into the ground?  All of these man-made production methods add cost and complexity.

-- Reservoir size:  If the oil reservoir is large, then the cost of the infrastructure to produce it is generally smaller when calculated on a $ per barrel basis.  You wouldn't want to spend a billion dollars on an offshore platform if the recoverable oil was only a million barrels -- the "break-even" oil price just to recover the infrastructure cost would be $1000/bbl.

So, as demand (and oil price) increases, so does the incentive to develop the higher cost fields....deeper well depths, deeper water offshore fields, smaller reservoirs, remote locations with no pre-existing supporting infrastructure (roads, utilities, pipelines, available workers, supporting businesses, etc), harsh arctic climates, hostile countries with unstable governments (that at any moment could nationalize the oil industry and "steal" your investment) -

But generally it is price stability and conservative predictions of future oil prices (which are high enough to make these projects profitable) which drives the development of higher cost projects.  Stated differently, higher demand and higher prices cause higher cost production to occur, and actually precede development of the high cost oil.  Thus, the technical reasons behind the higher cost production have little affect on the price of the commodity.

Answer 3

Oligarchy & Cartel

Just two words that describe the oil industry.

Price fixing that isn't allowed in any other industry legally but is when it comes to oil.

Basically it's agreed price fixing on a very grand scale.

Makes you wish you were a Saudi Prince doesn't it...

Answer 4

It is also the futures market inflating prices, they are betting on the demand going up so in effect they are inflating the price before it is actually sold.

Answer 5

because there is a demand if the oil companies are unable to keep up with it the oil price goes up.  

So if a oil company only runs at 60% we lose the 40% that they could be producing.  which is where the demand comes from.

While they are not suppost to be able to influence the market with there production.  they do.  APAC is who regulates this and are the ones that tell the companies how much to produce. the companies can have an accident or go down for maintence and not comply.  So really who is control APAC or the oil companies.