Marginal Cost of Production for Oil

June 19, 2012

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Generally speaking, it’s much better to buy commodities when they are trading below their marginal cost of production. This is where supply destruction takes place.

However, this figure is a bit of a moving target: input costs fluctuate; technology improves; and costs vary by location.

In 2011, the marginal cost of production for oil was $92.26 for the 50 largest listed oil and gas companies, according to the Wall Street Journal. This will climb to $100 a barrel in 2012.

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Other factors need to be considered; for example, while Saudi Arabia’s cost of production is low, the House of Saud need to keep prices above $80 to fund their social programs. We can conclude OPEC action will likely come in around this figure.

You can find a similar chart for the marginal cost of natural gas in this post.

Source: Oil Price Likely to Stay Buoyed by Marginal Costs

Further Reading:

Innovation as a Risk to Commodities Investing

Goldman Sachs Explains What Moves Commodity Prices

Long Term Commodity Price Charts

Backwardation in Futures Markets Correlates with Low Inventories

Open Interest in Futures Markets Predicts Stock, Bond, Commodity and

Deutsche Banc Provides Color on Food Prices

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