There's a lot of debate about what's behind these week-to-week oil price fluctuations -- what's causing a particular runup, what the price "should" be, and who or what is to blame. It's clear that the longer-term trend is for a decline in global oil supplies and a steep rise in prices. Blame geology. Within the trend, of course, there are going to be bumps, blips, and "stairsteps."
It looks like we've seen several stairsteps in the past year or so.
Bottom line, there's a new "floor price" for oil -- about $110 per barrel, according to
a recent study by the Dutch energy institute, the Clingendael International Energy Program (CIEP). Their analysis includes a breakdown of the cost components:
Until recently, the oil price was largely underpinned by the marginal cost of the last barrel needed to match demand, with some political and economic conjuncture mark-ups or -downs. This currently puts a structural floor of $110 a barrel under the oil price (WTI). The largest part of the $110 a barrel floor (about 70-75%) is determined by the marginal cost of supply, currently around $80... The remaining $30 a barrel (or 25-30%) is determined by supply-demand fundamentals, a short-term risk premium, and long term scarcity and policy...
- $80 "marginal cost of supply" = cost to produce. In the past, accounted for nearly the whole price.
- "supply-demand fundamentals" = demand destruction (via price increases) due to undersupply.
- "short-term risk premium" = futures trading manages risk when prices are uncertain.
- "long term scarcity" = well, long term scarcity.
Oh, yeah: "floor price" = "get used to it." The sooner we do, the sooner we can start getting serious about a post-oil world.
More
analysis of the report at The Oil Drum.
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