Well that's right. Because at 35.00 dollars a barrel, not only is one sitting well, well below the average cost of global incremental (new) supply--but--one is sitting very close to the average cost of global current global supply.
The current price of oil is enough to keep non-OPEC supply "somewhat steady" but it's not enough for non-OPEC to create new supply--in the aggregate. In OPEC, the current price is enough to start investment in new supply. However, Khurais in Saudi is a beautiful example of how even in OPEC, the structural cost of new supply is on the rise--for geological reasons.
There is also the psychological factor. We know that both the creation of new supply in non-OPEC and the limiting of new supply in non-OPEC works with a lag. If this continues to be the case, higher prices will have to endure much longer now--well into next year--to make a non-OPEC producer inclined to take on the risk of a new project.
Finally, here is one way of looking at all this that is truly very interesting: the spread between the current cost of supply as expressed as a global average, and, the cost of the net new barrel expressed as new increment supply--has blown out. As I said in the post which starts this thread--but just to put a little more on it--I see the average cost of OPEC supply of crude oil at around 20.00 a barrel, and in non-OPEC around 40-45 a barrel. These are my current best shots at what is a very large and unwieldy landscape. But, to bring on the new barrel globally is something close to 80.00. In 2008, I had that at 90.00. There is indeed some new oil out there that will only cost you 60 to get but some will cost you 100 to get. (As the Brazilians have discovered).
This blow out in the spread has many implications. Here's another: how shall we price current OECD inventories of oil and oil products, currently at decade highs? Should we price them as a cheap mountain of oil that was originally extracted at X, or, perhaps that mountain should be priced in a way to key off what a net new barrel would cost.
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