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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