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

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