In 2020, the Russian leader had said that he is comfortable with a Brent price around the $40 per barrel level. Therefore, the production cost of crude oil is an enigma and a state secret. The Russians, under President Vladimir Putin, is structured as an oligarchy. Russia is an enigma when it comes to the cost of production for the energy commodity. Story continues Russia- Output costs may not matter as much in the west While the nominal production cost of oil is the lowest in the world in Saudi Arabia at $2.80 per barrel, the requirements for revenues creates a wide gap between production economics and balancing the Saudi budget. The rising costs of running the country have pushed the break-even level of the price of the energy commodity to over $80 per barrel on the Brent benchmark. Meanwhile, the Saudi economy depends on oil revenues. Saudi Arabia’s vast reserves make production as easy as turning on a garden hose in our backyards for the country. The Saudis have long been the most potent force within OPEC, the international oil cartel. Over half the world’s crude oil reserves are in the Middle East, and Saudi Arabia is the leading producer in the region. Saudi Arabia- Think turning on a garden hose Saudi Arabia, Russia, and the United States are the three leading oil-producing nations in the world, and each has different sensitivities to output costs. In the crude oil market, output costs vary according to the production location. Production cost is one of the critical variables that fundamental analysts use to project the path of least resistance for market prices. High prices lead to glut conditions, and low prices often create shortages, over time. The price cycle in a commodities market can change because of exogenous events, but it tends to be efficient. The demand tends to increase as consumers take advantage of lower prices, and inventories begin to decline, leading to price bottoms. When the price of a commodity falls below the cost of production, output slows. ![]() As a market becomes more expensive, the elasticity of demand causes consumers to look for substitutes and buying declines, leading to price tops and reversals to the downside. ![]() Higher output leads to growing inventories. ![]() The price cycle in commodities causes prices to rise to levels where production increases. ![]() When the cost of production is higher than the market price, output declines as it becomes a losing proposition. A profitable production process provides an incentive for output. OPEC+, which comprises the cartel’s 13 oil-producing states and ten other allied nations such as Russia, represents over 40% of the world’s oil production.If the market price of a raw material is higher than its cost of extracting it from the crust of the earth or any other form of production, it leads to increased output. Exxon estimates recoverable reserves in the Stabroek Block to be around 11 billion oil-equivalent barrels. “Right now, the idea is to get as much of these resources out of the ground as quickly as possible given that we are not sure of the window we have in the future,” Guyana Vice President Bharrat Jagdeo told the Wall Street Journal.Įxxon Mobil and partners Hess and CNOOC produce about 375,000 barrels per day of oil from an offshore field in Guyana. Saudi Energy Minister Abdulaziz bin Salman and Haitham al-Ghais, secretary general of the Organization of the Petroleum Exporting Countries, both invited Guyana to join the cartel in recent months, the Wall Street Journal reported on June 26, citing two OPEC delegates. (The author is a Reuters Breakingviews columnist.
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