Who Wants The Highest Crude Oil Price? Presenting The OPEC Cost Curve

Tyler Durden's picture




 

With the presidential elections fast approaching, the last thing the incumbent wants is for the one thing that can spoil the party - a surge in oil, and thus gas prices - to happen. Which is why despite a sharp return in Iran/Syria war rhetoric, we doubt that the trade off between a "wag the dog"-type transitory war euphoria and $5 gas will be an accretive one for the administration at least in the short-term. Others who certainly would prefer to avoid the record $140 WTI prices seen just before the Lehman collapse are the majors, where margin contraction can only be offset by very finite end-demand destruction. Yet there are those who not only would like to see a surge in oil prices, but in fact need it, to preserve their viability. Chief among them: Iran. Because according to a just released analysis by the Arab Petroleum Investments Corporation, the price at which oil (read Brent) must trade for Iran's budget to balance has soared to $127/barrel, the highest among all OPEC members, $20 higher than 2 years ago, and about $17 higher than the Friday closing price. And far more dangerously, the APIC study has also found that the cartel (which after last year's fiasco in Vienna is anything but) breakeven price has soared from just $77 two years ago to a whopping $99/barrel. Which means that any and every deflationary plunge in oil prices will inevitably be met with a supply collapse or else OPEC members are in danger of pricing themselves right into fiscal insolvency, and economic collapse.

Visually, the breakeven price for every OPEC member country.

And while those with a sense of humor can see why it is, perversely, in Iran's favor to start a contained war which will not destroy the country but merely lead to surge in oil prices, the danger is that even Saudi Arabia - a critical long-time ally of the US in the region - has gradually seen its interests align increasingly against those of the US, namely in that its breakeven price has risen from $80/barrel to $94 currently. While the Kingdom itself claims it can "cope" with a price of $75/barrel, this is obviously for posturing purposes.

Which begs the question: with all OPEC members implicitly in favor of a big jump in Brent prices, even at the risk of demand destruction among the developed world, how will all this factor into the latest Nash Equilibrium in which the world can forget about "sustainable" double digit Brent prices for ever.

Some other observations from the report:

  • OPEC proven hydrocarbon reserves have been revised upward to 254 billion tons of oil equivalent (toe), at the end of 2011. These reserves are 66% crude oil and NGLs and 34% natural gas. Yet-to-find would raise proven reserves by 25%.
  • The R/P ratio (proven reserves over production) is about 113 years at the end of 2011. As it is static, this ratio is not used to indicate a time to depletion but to justify the long-term timeframe for the analysis up to 2100.

On this basis, Figure 3 illustrates a baseline scenario, tuned to current OPEC’s ‘Reference Case’. Combined oil and natural gas production profile reaches a maximum of 3.715bn toe in 2035, beyond which aggregate hydrocarbon exports start to decline. The falling off after a 10?year plateau is moderated by the greater weight of gas production in the long term. Another critical time occurs when domestic demand exceeds production around 2065 and, as a consequence, hydrocarbon rents dry out. Obviously, some member countries would face declining exports much sooner than 2035.

Then again, by 2035 the world will certainly have bigger problems to worry about than just peak oil.

Full APIC study here, h/t ldt0

0
Your rating: None
 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sun, 08/12/2012 - 11:58 | 2698750 Seize Mars
Seize Mars's picture

I actually read the Mighty Koch Brothers' book, (can't remember what it's called) in which they draw a graph like the "cost curve" above. I thought it was pretty cool. Think of it as the "supply" part of a supply demand diagram. Then, if you overlay it with your forecast of demand, you can model a price forecast. Pretty cool.

Sun, 08/12/2012 - 13:17 | 2698837 engineertheeconomy
engineertheeconomy's picture

7 Billion Sold (Enslaved)

http://www.youtube.com/watch?v=akc99rDuGy0

 

Sun, 08/12/2012 - 14:26 | 2698956 Benisprintingqu...
Benisprintingquintillionsbehindourbacks's picture

Dude, bummer Tyler kicked you off Zerohedge... guess you're getting a little too close to the truth with this one lol

Sun, 08/12/2012 - 13:06 | 2698839 SWRichmond
SWRichmond's picture

If anyone wants to understand why oil can't stay below $85.00, the graph shows why.

Sun, 08/12/2012 - 23:50 | 2700082 Deo vindice
Deo vindice's picture

Here's how I see it. TPTB want oil to go higher. Much higher.

First the USA gives support covert or otherwise to the Muslim Brotherhood throughout the MidEast to topple the governments there. All under the guise of democracy.

Then they drive up the price of oil. When it hits a certain amount, they will open up their own reserves (Alaska, etc.) and sell it at 2 or 3 times the current price.

You know it will be close when the uprising starts in Saudi Arabia.

The oil-money men are mad with an insatiable desire for money and power.

Sun, 08/12/2012 - 13:41 | 2698885 trebuchet
trebuchet's picture

@SiezeMars: even cooler is to think about what happens when someone like saudi plays a capacity withdrawal game: 

 

Cut production by 10% pulling the supply curve to the left, automatically raise prices as the marginal producer is at a higher price. 

 

Nash equiibrium is to supply at or below the price of the marginal producer, for all players. 

you don't need a cartel to influence oil prices, just a big chunk of capacity control. Gets even better if you also control the marginal production capacity that will be doing the price setting

 

US oil firms in EYE-RAQ will be doing this since many times they are the marginal producer :) and they can stick the political fallout to the EYE-Rani boys for their bad behaviour and unstable oil prices

Sun, 08/12/2012 - 12:07 | 2698758 tom a taxpayer
tom a taxpayer's picture

One of the U.S. Navy's guided-missile destroyers was damaged when it collided with an oil tanker early Sunday just outside the strategic Strait of Hormuz.

http://www.dailymail.co.uk/news/article-2187303/USS-Porter-Mid-sea-drama...

 

Sun, 08/12/2012 - 12:48 | 2698801 yogibear
yogibear's picture

Too much partying on that Navy guided-missile destroyer.  The son of the captain that grounded Exon-Valdez was steering the Navy's guided-missile destroyer?

Sun, 08/12/2012 - 19:11 | 2699490 Sandmann
Sandmann's picture

USS Porter Navigation Officer drunk at post looking for icebergs

Sun, 08/12/2012 - 14:37 | 2698975 jonjon831983
jonjon831983's picture

Here is a nice comment from Bloomberg's:

 

http://www.bloomberg.com/news/2012-08-12/u-s-navy-ship-collides-with-oil-tanker-near-strait-of-hormuz.html

 

"Ok, how the heck does US destroyer with its sophisticated weapons systems not see an oil tanker heading straight or it? There is something not being told."

Sun, 08/12/2012 - 14:46 | 2698980 jonjon831983
jonjon831983's picture

Interesting comparing the Bloomberg and DailyMail's headline:

 

DailMail: "Mid-sea drama as tanker rips huge hole in side of U.S. Navy ship in late-night collision"

Bloomberg: "U.S. Navy Ship Collides With Tanker Near Strait of Hormuz"

 

DailMail's headine makes it clear the Tanker hit the Destroyer.

Bloomberg's headline is perhaps towards a more neutral stance, but leans more towards the Destroyer hitting the Tanker.

 

And from DailyMail's pictures, it looks like something plowed into the destroyer, don't see any burn marks at least to my untrained eye, so doubt it was anything else... unless tanker aimed for it?  OR if the destroyer tried to block the way (instead of shooting it up) of a conveniently Panamanian flagged tanker?

 

So the question is: Whose oil was in the tanker?  Iranian?

Sun, 08/12/2012 - 12:09 | 2698764 Camtender
Camtender's picture

What is a balanced budget?

Sun, 08/12/2012 - 12:14 | 2698771 old naughty
old naughty's picture

That's when you can match .gov spending to tax revenues.

Oh, never mind. We'll never see that for the decade head.

Sun, 08/12/2012 - 13:08 | 2698842 SWRichmond
SWRichmond's picture

The reason they don't have to balance the budget is because of the legal monopoly on the use of force.  They can steal as much of your shit as they want to.  All of it is then backed up by the central bank.

Sun, 08/12/2012 - 17:06 | 2699251 scatterbrains
scatterbrains's picture

and this is why more and more countries rich with natural resource will see the game for what it is, and while they may fear world CB's backed by the USSA, I'm sure they are finding ways to escape the paper ponzi..(gold etc.) or are we to presume they are all retarded and filled with glee to accept shit paper for their hard assets?

 

Sun, 08/12/2012 - 12:35 | 2698788 derek_vineyard
derek_vineyard's picture

a balanced budget is something that solvent and sane corporations, entities and people live by  (these sane entities also understand building a surplus and the freedom it gives them)

it really is that fxxking simple

Sun, 08/12/2012 - 12:57 | 2698823 Meremortal
Meremortal's picture

What is a budget?

-Harry Reed

Sun, 08/12/2012 - 13:06 | 2698835 LoneStarHog
LoneStarHog's picture

Balanced Budget in the U.S. Goobermint Operations Manual:  Spending (minus) Tax Collections (minus) Printing/Inflation (aka theft) (equals) Zero (Balanced Budget)

Spending in the U.S. Goobermint Operations Manual:  Pork Projects, Congressional Raises, Junkets (taxpayer-funded vacations), Sexual Services, ... anything/everything with no limits.

Sun, 08/12/2012 - 13:54 | 2698908 OneTinSoldier66
OneTinSoldier66's picture

What is a dollar?

Sun, 08/12/2012 - 12:16 | 2698772 LMAOLORI
LMAOLORI's picture

 

 

Iran might get it's wish that's the thing about DICKtator's they don't care how many lives of the citizens they lose if it keeps them in power.

 

Decision by Netanyahu, Barak to strike Iran is almost final — Israel TV

 

Sun, 08/12/2012 - 13:40 | 2698882 JR
JR's picture

One of the characteristics of dictators in the last 100 years is that they are also mass murderers. This definition does not fit the ruling authority in Iran. But it does fit Benjamin Netanyahu, who has the blood of millions on his hands – the innocents of Iraq, Libya, Syria, Lebanon and occupied Palestine. And the jury still is out on those workers in the World Trade Center.

Make no mistake, if Israel should ignite WWIII, the conflagration will sweep the United States.

Sun, 08/12/2012 - 12:20 | 2698775 hardcleareye
hardcleareye's picture

When you read the report on the link the first thing that jumps out is the the definition of "Break Even" for the purpose of this report is defined as "... the oil price that balances the government's budget."

This is NOT production cost or EROEI.

 

Sun, 08/12/2012 - 12:32 | 2698784 Amish Hacker
Amish Hacker's picture

Yes. A rising oil price would certainly help balance the budget, but so would cutting spending. Meanwhile, letting deficits run looks like the short-term fix that has been chosen, purely for political reasons. Longer term, I think oil prices will be determined by the metrics you suggest.

Mon, 08/13/2012 - 04:52 | 2700313 Dr Benway
Dr Benway's picture

I thought the article made pretty clear its definition of fiscal breakeven? Anyhoos.

 

I think the point the article was trying to make was that there are two outcomes for these countries: either high brent prices or spending cuts bringing potential social unrest and destabilization.

Sun, 08/12/2012 - 13:07 | 2698805 LawsofPhysics
LawsofPhysics's picture

Correct.  Oil companies don't give a shit about the government's budget.  For them, if the energy and capital invested is greater than the energy and capital that is being recovered after the oil is delivered then things get unprofiteable really quickly.

Sun, 08/12/2012 - 15:45 | 2699095 AustriAnnie
AustriAnnie's picture

Yet, unprofitable companies subsidized by or taken over by their governments can survive a lot longer than one would expect.

Politics is every bit as much a driver of oil prices as physical constraints.

I doubt we will simply see producers go banktrupt and die without massive gov't intervention/takeovers/rationing/price controls and wealth transfers from populace to oil producers, all so the elite can keep their energy needs met just a little longer.

Eventually, the laws of physics win, but politicians will distort reality as long as they can.  They will continue to incentivize production even beyond the point where it becomes unprofitable, because gov'ts love to prop up unprofitable enterprises.

Mon, 08/13/2012 - 06:21 | 2700320 Dr Benway
Dr Benway's picture

LOL. Yeah oil companies don't, but the people on the street do, especially when their handouts disappears.

 

There's more to articles than the bolded parts.

Sun, 08/12/2012 - 13:06 | 2698833 LMAO
LMAO's picture

I concur,

According to the Saudi "Oil Chief" their production costs are about $ 4 a barrel.

From 60 mins.:

http://www.cbsnews.com/video/watch/?id=4653139n

 

They need about $100 a barrel to keep the sheeple appeased.

Sun, 08/12/2012 - 13:35 | 2698876 disabledvet
disabledvet's picture

So what's the US price for same effect the?

Sun, 08/12/2012 - 14:28 | 2698959 CrashisOptimistic
CrashisOptimistic's picture

A veritable avalanche of things wrong in the article and in the comments.

1) Iran needs $XXXX per barrel price if and only if any of the numbers floating around about their exports (and used in the article) are correct.  Those numbers are political almost surely not correct.  Obama forces want to demonstrate how effective his sanctions are.  Iranians want to show they are not.  Bottom line, there's no evidence that anyone in Iran is starving, there are no riots in the streets, and both India and China are still buying Iranian oil.

2) Price of production of oil means several things.  If you just put a price on the oil flowing out of a pipe, the price is low.  You already paid for the pipe and pumps and all you have to do is hook it up to a tanker.  But if you want to MAINTAIN your flow rate, you have to drill new holes to offset the falling flow out of the old holes.  That's big money and big joules.  That drives up the overall average cost, measured in dollars and more accurately, measured in joules.  It takes energy to drill a hole, especially when you miss the target 3 out of 4 times.

3) The price of gasoline in oil exporting countries is very low because the government subsidizes it.  Why shouldn't they?  It's their oil.  Their people deserve it cheap.

4) Cheap gasoline in exporting countries ALWAYS results in growing consumption of gasoline in those countries.  As their oil production falls, as it inevitably will, the amount available to export falls faster.  There is some excellent analysis saying that indeed, the US will stop importing oil in 5-10 years.  This will not be because US production of oil increased.  It will be because there is none any longer available for export from exporting countries.

Sun, 08/12/2012 - 13:30 | 2698871 dirtbagger
dirtbagger's picture

Exactly.  with this type of reasoning there would be no reason for any one to start a business or to produce anything.   It has been a while since business school, but production decisions used to be based on marginal revenue exceeding marginal costs.    The articles on this blog are going downhill very fast.  The assertions of the authors are not credible under even the most basic scrutiny.  Are they paying to post? 

Sun, 08/12/2012 - 12:34 | 2698787 DoChenRollingBearing
DoChenRollingBearing's picture

What an interesting article, thanks for posting it Tyler!  I had thought that the break-even price numbers were considerably lower.  I guess this means, among other things:

1)  Cost of producing tar sands in Canada must be MUCH higher than advertised

2)  Cost of oil will be going up, up and away in the coming years

3)  Maybe green energy technologies have a chance after all

Sun, 08/12/2012 - 13:58 | 2698913 chipworley
chipworley's picture

Green energy technologies can never replace fossil fuel technologies.  Cost is too high and don't have near the volume of energy required.  They may be a small niche in nano implementations (ie a single family home)....

Sun, 08/12/2012 - 14:24 | 2698953 DoChenRollingBearing
DoChenRollingBearing's picture

I just saw a short article in Popular Mechanics that they are building a wind turbine farm in Oregon where the turbine blades are each as tall as the Statue of Liberty.  The article did not say anything costs though.

In terms of energy density you are correct.  But, there are probably other niches where wind & solar may help us lessen dependence on foreign oil.

Sun, 08/12/2012 - 12:37 | 2698791 FreeSlave
FreeSlave's picture

Is this the beginning of a creation of  "Greater Israel"?

Israeli military occupies parts of Egypt’s Sinai, reports say

http://www.presstv.com/detail/2012/08/12/255872/israel-occupies-parts-of...

 

Sun, 08/12/2012 - 12:50 | 2698806 francis_sawyer
francis_sawyer's picture

Are you sure the article is not confusing the "City of London" as the occupying force? [rolls eyes]

Sun, 08/12/2012 - 12:56 | 2698821 FreeSlave
FreeSlave's picture

and the US is being, and will be sacrificed in order to create a “Greater Israel”.  When will you wake up???

US police forces being Israelized: Gordon Duff

http://www.presstv.com/detail/2012/08/11/255710/us-police-trained-by-israeli-groups/

Sun, 08/12/2012 - 13:17 | 2698854 otto skorzeny
otto skorzeny's picture

Israelis have been training the local goon squad cops here in Will County IL in the yid "hand to hand combat" stuff here lately I have read in the paper. probably throwing in healthy dose  of "how great Israel is"  and the old"us cops against them" propaganda to the weak minds of the cops. next up in US-Gaza style checkpoints manned by paramilitary cops demanding your papers while they demean the women, kids and old men.

Sun, 08/12/2012 - 14:34 | 2698960 francis_sawyer
francis_sawyer's picture

 "City of London" I tell you... City of London... The Apartheid state of Israel is just a victim of circumstance... Poor blokes never could catch an honest break...

~~~

http://www.youtube.com/watch?v=Cd2_LKoTYKw

Sun, 08/12/2012 - 13:52 | 2698903 JR
JR's picture

Bloomberg is the voice of the police state.

News item:

In an interview with CNN in late July, New York Mayor Michael Bloomberg told the commentator that police officers should not protect Americans who oppose gun control. “I don’t understand why the police officers of this country don’t stand up collectively and say: ‘We’re gonna go on strike. We’re not going to protect you unless you, the public, through your legislation, do what’s required to keep us safe [through more gun control],’" he said.

The latest:

Mayor Bloomberg Turns NYC Into a Microsoft Surveillance State : Everyone will be watched.

The New York Daily News reports:

August 9, 2012 -- The Domain Awareness System designed by the NYPD and Microsoft Corp. uses data from a network of cameras, radiation detectors, license plate readers and crime reports, officials said…

“We’re not your mom and pop police department anymore,” Mayor Bloomberg crowed. “We are in the next century. We are leading the pack.”...

http://www.economicpolicyjournal.com/

Sun, 08/12/2012 - 12:40 | 2698792 FranSix
FranSix's picture

Actually, a cost decline in oil prices will have the same effect as a copper price decline,  namely that hoarded supplies will be dumped summarily on the market resulting in a glut.  Thus ends the inflation story.

They speculated that the same will happen to gold, but not so fast.  There is a peak in bond prices for the moment, thus bullion will be under greater demand.  I believe this will come out of the intense need for short term monies, which the gold market can provide, but at a higher price.

Sun, 08/12/2012 - 13:02 | 2698830 qqqqtrader
qqqqtrader's picture

something has to give soon,

gold and crude trading below the polynomial trend...

 

gold-crude-silver trend

Sun, 08/12/2012 - 13:07 | 2698840 FranSix
FranSix's picture

We saw a peak oil price in July, 2008 and a sell-off, maybe the same will occur again.

Sun, 08/12/2012 - 13:32 | 2698874 malikai
malikai's picture

Don't forget what comes after the ending of "the inflation story"..

Sun, 08/12/2012 - 12:43 | 2698794 Sandmann
Sandmann's picture

Isn't is also true that US and EU Obsession with Biofuels driving up food prices is causing budget problems for countries that import grain such as in the Middle East ? So Iran has to increase food subsidies which currently consume 30% GDP and Saudi has to increase food subsidies and China and Indonesia have to increase fuel subsidies for cooking.

Surely it is Western Stupidity in tying food prices to oil with the Biofuels Lunacy that is driving everything in a circular upward spiral.

http://uk.reuters.com/article/2012/08/10/uk-food-biofuels-fao-idUKBRE879...

http://www.indexmundi.com/iran/economy_profile.html

 

 

Sun, 08/12/2012 - 13:50 | 2698896 Tom Green Swedish
Tom Green Swedish's picture

Jump on the lunatic bandwagon.  We can make it a permanent bubble of mass proportions.  Malnutrition is much worse than going to buy some Chinese crap at the store or going for that joyride.

Sun, 08/12/2012 - 12:44 | 2698796 LMAO
LMAO's picture

"breakeven price has soared from just $77 two years ago to a whopping $99/barrel"

I assume that's the price the OPEC mobsters need to keep their countries running. I wonder, do they truly believe they can outrun austerity? Even OPEC members must start to cut gov't spending somewhere down the line.

.....and maybe, they should just consider stopping trading their oil for paper fiatsco's........

 

Sun, 08/12/2012 - 12:51 | 2698811 LawsofPhysics
LawsofPhysics's picture

Oil, in many ways is already a reserve currency of sorts.  FYI, the BRICs have already started avoiding dollars.

Sun, 08/12/2012 - 13:28 | 2698847 LMAO
LMAO's picture

 

I am well aware of the fact that the BRIC's are in the process of implementing their own fiatsco's for international transactions.

Still, apart from Iran, bulk Opec is still a Dollar business.....and I can't see the house of Saud saying no to $$ anytime soon.

EDIT:

BTW serial junker on the loose? Some weird and random down-arrowing for stating facts or expressing an opinion.

Do NOT follow this link or you will be banned from the site!