Tuesday, April 30, 2013

We Will Never See Cheap Oil Again

Doesn't $2.50 per gallon for gasoline sound just dandy? During the 2012 presidential race, a couple candidates used that number as a way of showing how increased American production would lead to lower prices and higher energy security. The problem is, though, that despite the increase in production in the U.S., cheap gas and cheap oil will more than likely remain a pipe dream.
Let's look at why oil prices will remain high despite our best efforts.

Drilling costs just aren't what they used to be

The boom in U.S. energy has been made possible by several factors: development of advanced drilling technology, a large distribution network already in place, and a favorable regulatory framework. One element that is commonly overlooked, though, is the price of oil production. Accessing shale deposits requires not only deeper wells, but also much more energy for extraction. Today, wells are drilled for miles underground and cracked open with high pressure pumps and lots of water. Chesapeake Energy (NYSE: CHK  ) estimates that each new well requires 5 million gallons of water. Despite the best efforts of exploration and production companies to reduce costs, these new drilling techniques have break-even wellhead prices for most U.S. shale plays at $55-$80 per barrel.

The U.S. is not the only country that needs expensive oil prices. Both Russia and Saudi Arabia, the two largest global oil producers, need high oil prices for economic sustainability. For Saudi Arabia, its $630 billion economic development program is funded on the back of its national oil company, Saudi Aramco. In order for the country to meet its budgetary obligations, it needs current production levels priced at about $90. The same can be said for Russia; its government's largest revenue source is oil royalties. For the country to balance its budget, oil export prices need to be north of  $120. For both of these countries, it is imperative that oil prices remain high enough to prop up government spending.  (more)

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