The Economics Involved in Oil Drilling and Extraction

The world runs on fossil fuel. Oil plays a large part in fossil fuel production. We will one day run short of oil. By short we mean we will one day run out of oil. We will we be running out of oil anytime soon. When we do, though, we will need to find an alternate way of fueling our motor vehicles. Here are a few pointers on the way the economics of oil work, today.

Variability of Oil

Oil is classified in two ways. The first way it is classified as heavy or light. The second classification as sweet or sour. It is the second classification the world needs concern itself with more. Light and sweet oil require processing. But this can be refined into oils like fuel for our motor vehicles, just as the industrial fuel supplier company Spectra Oil produces. While heavy and sour oil needs intense processing.

A Moving Profit Point

Just like there is no one clear oil production method, there is also no one set price per barrel. Companies price their barrels off the Brent crude price. The Brent crude price is an index of what a barrel of oil will cost. Most of the time, companies will price their barrels across this index.

The Brent crude index might say, $100 per barrel. It might sound like every crude oil company in the world should be creating a profit with their oil. However, it is not always the case. There will be companies that will have an extraction cost of maybe $25 per barrel. These companies will make $75 for each barrel that is produced in their fields. However, in contrast, there will also be companies that pay $102 per barrel to extract the oil. These companies will be losing $2 per barrel for that round of extractions.

The Uneconomic Production

When times get rough in the oil production industry, oil refinement companies tend not to scale back on labor or other costs. Many of these companies count on long-term oil production from one well. What that means is that they will have a big balance sheet in order. They will be able to handle the loss when oil prices drop. That is why companies that have a $2 loss on some barrels are not concerned.

If companies begin to layoff their labor force, they will find themselves in need of a new labor force. Not only will company ‘A’ necessitate a new labor force, but company ‘B’ will as well. Company A will then begin to compete with company B for a skilled labor force. Many companies do not let their labor force go when the price of oil drops.

Supply vs. Oversupply

In an ideal world, the price of oil would remain the same day in and day out. However, as much as we would like to, we do not live in an ideal world. The price of oil is based on what is called supply versus demand. If there is an overabundant supply of oil, the prices will go down. However, if it appears there is a shortage of fuel versus the demand for it, the rate will increase. It is times like these when the smaller companies need to worry about losing their companies.

In short, this article discussed the economics of oil production. We touched on the two types of oil the world produces. We also moved on the way companies survive when the price of oil drops. Finally, we finished up with the supply versus oversupply. Of course, that usually means supply versus demand.

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