If we take the production cost of Gulf oil as the price that guarantees the proper functioning of the state — as is currently the case — this cost must be considered the highest in the world.
The biggest loser in any potential drop in oil prices is neither Canada’s tar sands nor those involved in the production on the high seas, but rather the Gulf countries. This conclusion is based on an old economic theory that the production cost of a depleting resource is limited not only to its extraction cost, but also to the exploitation cost, which includes the expense of finding an alternative.
Opinions vary regarding the alternatives. Is it simply a barrel, or an equal quantity of fossil fuel from another source? If the cost includes the alternative, does it also include the cost of moving from a rental economy to a non-rental economy?
The fact is that some Gulf countries cannot currently afford for oil prices to fall below $80 a barrel (or even above this mark, eventually) in order to meet the needs of their developmental and social programs.
Currently, oil prices are equivalent to $100 a barrel, which is fine. However, the possibility of things turning upside down overnight looms on the horizon. This isn't just due to the oil and gas revolution in the United States, but also to technological improvements in recent months, which reduce the production cost of oil and gas, along with the oil-production cost from the Canadian tar sands.
This price level, which OPEC countries need to achieve economic and political stability, was calculated in a specific way. This price is different from the price upon which these countries’ budgets are based. It consists of targeted growth rates, job creation, political stability, spending requirements outside these countries’ budgets and development and various social programs, as well as foreign aid.
When reviewing these figures, we find that Saudi Arabia, Iraq, Libya, Algeria and Iran need the price of oil to stay around $90 a barrel, while Venezuela needs it to be $80 a barrel; Angola and Kuwait about $70; the UAE $67 and $60 for Qatar. Moreover, if we consider the potential average based on production quantities, we find that the average price that OPEC countries need a barrel of oil to be is $85.26. This figure is equal to the oil price upon which Oman’s budget was based and below the value required by Russia’s budget, which was estimated at $97 dollars a barrel.
Experts agree that private companies in non-OPEC countries are the primary competitors of the region’s national oil companies, if the production cost of these companies falls below the price required by OPEC nations. Moreover, if the cost repeatedly declined while the price that these countries require increased, we can conclude that the latter would be in danger.
A quick look at US fields indicates that the cost of a barrel of oil is less than $85 and most companies could remain in production even if the oil price decreased to $60 a barrel.
In the Mississippi Lime field in north Oklahoma and south Kansas, the production cost is around $47 a barrel, including taxes and royalties, while the production cost in the Utica fields in Ohio has reached around $60 a barrel. These costs are tempting, given the fact that oil in these fields is among the purest in the world. The price of their international equivalent exceeds $100 a barrel.
This type of oil does not compete with Gulf oil, which is seen as having a mid-level purity. For this reason, previous articles mentioned that an increase in the US oil production would not have a significant impact on Gulf countries, particularly US imports from Saudi Arabia.
However, the first competitor to the Gulf countries is Canada, which produces different types of heavy oils, most of which come from the tar-sands field in Alberta. Some people say that oil from tar sands, where the production cost exceeds $90 a barrel, can never compete with the Gulf oil, the production of which costs a few dollars.
The truth is that this opinion is outdated. We have explained that the price per barrel of oil needed by the Gulf exceeds $80, and oil production from tar sands doesn't cost less than $90 a barrel. However, this latter cost is continuously declining and the price needed by the Gulf increases on a daily basis.
The first projects to extract oil from tar sands took place while prices were low. These projects required prices to be at $35 a barrel. This fact has not changed much for these projects. What has changed is that the cost of new projects has significantly increased with rising oil prices, which have reached $85 a barrel.
However, technological advancements in the last three years made it possible to significantly reduce production costs, enabling all tar-sands projects to make profits exceeding 10% with oil prices around $75.
If we look at the revenues of current projects as oil prices are around $100 a barrel, we find that the Firebag Stage Number 4 has made about 40% profit, while other projects, such as the Cold Lake, Firebag Stage Number 3 and Sunrise has made around 20% profit.
Other projects such as Kearl Oil Sands have made up to 10% profit. Are some of the OPEC countries able to live with $75 dollars a barrel?