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Comment by rtpg | Hacker News Reader

is the fact that it's dropping below $30 right now mean that the previous $100+ prices were completely inflated compared to COGS? The massive fluctuations for something that you just need to pump out of the ground doesn't make too much sense to me (compared to, say, price of potatoes)

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Yes, a barrel of oil brought up by fracking costs around $62 (Canadian oil sands cost $74) per barrel(according to NPR below). Though that is total cost, marginal cost of pumping after you drill and frack the well is around $35.

Oil demand tends to be fairly inelastic. Almost all of oil pricing is supply driven. OPEC decides on a target price and produces to meet that price. The current price has happened because Saudi usually stops producing to keep prices stable and high, and for now they just haven't slowed down at all. Either they need money badly enough that they will take any profit at all or they are using oil prices as a weapon.

http://www.npr.org/2014/11/04/361204786/falling-oil-prices-m...

I don't understand the "they need the money argument". They were producing 9 million barrels per day and that achieved a price of $100 per barrel... now they are producing 10.5 million barrels per day and price is <$30 per barrel.

other nations have increased supply whilst demand has fallen at the same time, therefore to sell the extra oil being produced prices have to fall.

If the future outlook for oil prices are lower than what they sell at today — it makes sense to produce as much as you can today.

Fracking in ND is much lower than $62 depending on the site. $36 was the cited figure in a lot of articles and post (see my previous comments).

there's probably a few things going on:

1. strategic decisions to keep the price low (in some cases below the cost of production) to make it uneconomic for competitors to invest in oil projects

2. time lags in the system. e.g. the global economy went into recession the last time the oil price spiked. that'd reduce oil demand in some cases. now as prices are much lower again we might expect demand to keep growing until supply isn't able to satisfy demand (again), then the price will spike again

3. (long term trend) oil is becoming genuinely more costly (in physical terms - i.e. required energy) to extract as we deplete the low hanging fruit. i guess this makes it much harder / impossible for supply to ramp up and satisfy demand in a short enough time period before another recession is triggered. this isn't necessarily a problem in itself but perhaps it influences the behaviour in item 2

This is probably only semi-coherent. I read the "limits to growth" book a couple of weeks ago, and one of the claims there (from a system dynamics perspective) was roughly that any system that combines both delays in feedback and erodible limits is expected to either behave like "overshoot and oscillation" or "overshoot and collapse".

OPEC has recently lost effectiveness. Back in the days of $100 oil, it was at least partly successful in restraining production from member states.

Other global factors have also contributed. Fracking has really had an impact on US production:

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=M...

Not an expert, China economy slowed, fracking is up.

In addition to that, sanctions lifted from Iran. Iran and Saudi Arabia are the most influential members of OPEC and they don't get along whatsoever. Meaning the Saudis and the Iranians will break rank and try to claw out more market share by ramping up production.

Additionally, more in response to rtpg's comment: it is very costly and technically challenging to stop or reduce oil production, hence the price volatility is the result of volatile demand fighting it out with very stable supply.

I also suspect Saudi Arabia is trying to rattle sabers with Iran for a variety of reasons. The recent execution of the Shia cleric had to be aimed at Iran. Plus the Yemen conflict etc.

They might be about to bite their nose off to spite their face. They have a supine populace on the back of their state handouts and cushy government jobs. If that goes away as a result of falling government revenue then the country will probably become less politically stable.

Yup. That's my outlook on this too.

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