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The Price and Profits of Oil

Understanding the price of oil and how countries survive on a single valuable resource.

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By Jakub Chrobok & Mónica Alejandra Rodríguez Sosa
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Extraction is not as simple as making a hole and trying to contain the geyser of oil. Each source provides its own source of challenges and these come with their own price tags.

These include:

It costs Norway $23.00 USD to produce a barrel of oil. In Nigeria, these factors add up to $139.00 USD per barrel. At a price of $71.60 USD, Norway profits while Nigerian oil production sees a loss.

Overview breakeven prices,
selected countries 2016–2019:

The higher the profit required,
the more dependent a country
is on it's oil.

Norway is cushioned against price changes.
Nigeria, however, needs oil to sell high to see any return on the cost of extraction.
Benchmarks are the standard price at which a barrel of oil sells at. For each type of oil, there is another benchmark.

*Date: 02.05.2019 / Brent pricein USD

The most popular global benchmarks are
Brent Crude from Europe and
West Texas Intermediate (WTI) from the USA.
Both represent different grades of oil.

An increase in price comes when there is not enough oil to meet the demand. Consumers have a limit to what they are willing to spend on buying oil, so the more expensive it is, the less buyers they are,
it indicates a lack of supply, which also then decreases demand.

If the price falls this means the market has too much supply and producers are forced to sell at lower price or else pay the expense of storing until the price goes up.

But the supply of oil is also a variable heavily influenced by political events.

Ups and downs in the price are attached to civil wars, terrorist attacks, government oil revenues, dictatorships, etc.

Highest price of oil in history!
In 2012, Brent costed $111.63 USD per barrel and WTI $ 94.05 USD.

GEOPOLITICS

When a government makes cuts to production, people lose jobs and this can lead to anti-government sentiment. This can lead to attacks to sites, increasing costs for extraction.

ACCESS TO TECHNOLOGY

The latest innovations make exploration more efficient, saving costs, but also requires an investment. Not all countries that rely on oil can afford this investment.

ACCESS TO MONEY

Oil producers – even nationalized ones – require some form of public investment. For those that are traded in markets, they need the stock market to perform to keep attracting new investments that pays for the exploration and development of new supply sources.

OPEC STATUS

The Organization of the Petroleum Exporting Countries (OPEC) is an international cartel designed to give its member states more control over the price of oil. Its members coordinate production in order to control the price, ordering more or less output depending on how they want to affect the price.

REFINERIES AND SUPPLIERS

Not all oil is equal. A light blend is more desirable because it is easier (and less expensive) to refine. Entities that extract oil (suppliers) can also be public, national or semi-national, which defines its measurements of success, including efficiency.

ENVIRONMENT

Natural forces like hurricanes can hurt supply as well as demand: It can take down drilling platforms, reducing supply, but also take refineries offline, affecting demand.

All of this adds up to oil producing states needing
a certain price
per barrel to balance their budgets and continue production.


For example…

NIGERIA

Africa’s top oil producer has a high breakeven price as its oil deposits are difficult to access, has an inefficient government and lacks technology. Political movements like the Delta Avengers also attack infrastructure, requiring heightened security and/or expensive repairs.

*Date: 02.05.2019

NORWAY

The Scandanavian producer profits even at low market prices as its deposits are easily accessible. Production costs are further reduced with access to technology and taxes are relatively low on production costs.

VENEZUELA

Political unrest and a failing economy leaves oil as one of the country’s only ways to fund its national budget. It accounts for 96% of its exports and makes up 40% of government revenues, leaving its survival in the hands of the market.

MIDDLE EAST AREA

Saudi Arabia, Iraq and Iran can easily access their vast oil reserves and have stable production capacity, resulting in a low breakeven price. The region still has its risks due to its fragile political situation and susceptibility to outside influence, such as the sanctions currently in place against buying Iranian oil.

USA

With its vast geography comes a vast difference in oil access and production. The country’s producers have a range in the breakeven price depending on what kind of production they do. However, on average, these producers still make money as long as the price per barrel price floats around the $42 USD.

Sources

The Price of Oil Dependency, StatistaRegional Economic Outlook May 2018, International Monetary FundRegional Economic Outlook May 2018, Statistical Appendix, International Monetary Fundoilprice.comOil Prices Explained: Putting a Dollar Value on a Barrel of Crude, Oil Sands MagazineCost of Producing a Barrel of Crude Oil by Country, KnoemaBreakeven Fiscal Oil Price for Rusia, FRED Economic DataR.L. Kleinberg, S. Paltsev, C.K.E. Ebinger, D.A. Hobbs, T. Boersma (02.2018): Tight Oil market dynamics: Benchmarks, Breakeven points and inelasticities in: Energy Economics, Volume 70, S.70–83Kenneth Wemer (07.2017): Finding Bottom in the Oil Patch, HighMark Capital ManagementNerijus Adomaitis (07.01.2019): Norway Oil Investment to Rise in 2019 before Sliding: lobby, ReutersBradley Olson, Rebecca Elliott, Christopher M. Matthews (02.01.2019): Fracking’s Secret Problem—Oil Wells Aren’t Producing as Much as Forecast, Wall Street JournalWSJ News Graphics (15.04.2016): Barrel Breakdown, Wall Street JournalElliot Bentley, Pat Minczeski, Jovi Juan (26.07.2017): Which Oil Producers are Breaking Even?, Wall Street JournalMarin Katusa (23.06.2017): A Guided Tour of the Oil Crash… and My Outlook for the next 18 Months, Katusa ResearchBen Aris (26.01.2018): Russia Inc Goes Into Profit as the Budget Breakeven Price for Oil Falls to $53, Moscow Times • Arturo Carranza, Energy Consultant de Mercury LLC • Atzayahel Torres, El Financiero Bloomberg





Disclaimer:
Breakeven price and cost of production chart is compilation from a variety of sources. Each estimate is still considered a valid indication of those countries between 2016 and 2019 breakeven price according to the sources – but it keeps always changing. The available data for the breakeven prices of Bahrain, Azerbaijan and Oman are dated on 2016, Nigeria, Saudi Arabia, Libya, UAE, Algeria, USA, Irak, Qatar, Iran, Kuwait, Venezuela, Russia on 2017, and Norway on 2019. The available data for cost of production of oil in Bahrain, Azerbaijan, Oman and Qatar is from 2014. Rested on the data of 2017 for Saudi Arabia, Russia, Libya, UAE, Algeria, USA, Irak, Iran, Kuwait, Norway and data of 2016 for Nigeria and Venezuela.
See Energy Economics abstract Tight Oil market dynamics: Benchmarks, Breakeven points and inelasticities as mentioned in the sources.

Credits

Art Director:
Jakub Chrobok
Design:
Mónica A. Rodríguez Sosa
Research:
Mónica A. Rodríguez Sosa, Anja Rieckert, Anni Peller
Text:
Sabine Devins, Hilary Bowen, Mónica A. Rodríguez Sosa

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