The Cruel Math of the Marginal Barrel

Executive Summary

• Why oil price vulnerability is growing 
• Why the marginal cost of oil is rising higher at an accelerating rate
• Why the marginal cost of oil for non-OPEC regions is now above $90
• The hard math explaining why an increase an output from OPEC will no longer reduce the world price for oil
• The new rules that will govern the price of oil from here
• The alarming growing risk of large-scale war for oil

Part I: OPEC Has Lost the Power to Lower the Price of Oil

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: The Cruel Math of the Marginal Barrel

An unpleasant megatrend that has affected global oil production the past decade has been the quickly escalating cost of production. However, prices have finally risen high enough to stabilize declines in regions like North America.

This actually makes for a new and emerging vulnerability: the risk that prices fall at some point through levels that remove the new oil supply.

Given that world oil production has been trapped below 74 mbpd since 2005, and that the cost of the marginal barrel keeps rising, this vulnerability is growing.

Let’s first take a look at North American crude oil production:

As we can see, the combined production of Canada-US-Mexico has been in decline for a long time. But this decline stabilized just recently, as prices were finally sustained at high enough levels to bring on some new supply.

While Mexico’s production has not increased at all, but merely stabilized at low levels, US production has recovered by a half million barrels a day (compared to a five-year trailing average) and Canada’s production has finally started to push forward, recently hitting the 3 mbpd mark.

Despite what you read in the newspapers however, these new production advances in the US — and also especially in Canada — are not rapid. It has taken years of investment to create this new supply. And it has taken the promise of, and the reality of, higher prices to inch supply higher, now back above 11 mbpd. 

The Cruel Math of the Marginal Barrel

Thus, we come to the emerging problem in global oil: The cost to bring on the marginal barrel of supply keeps rising, ever higher and ever faster.