Strictly: Drilling and oil-field services Message Board

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Gold/Mining/Energy : Strictly: Drilling and oil-field services

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To: marc chatman who wrote (22622)	5/21/1998 1:58:00 PM
From: Grommit	Read Replies (2) of 95453

Back to basics... Who remembers economics 101? I will try. The price of oil will stabilize at the marginal cost (in the economics sense, not the accounting sense) of producing oil unless artificial production curbs can be instituted. So the oil producers will make their justified profit, and will make monopoly profit only if they can limit production. Basic and simple. We have seen that OPEC seems to have lost its ability to keep oil prices near $20. Is it due to a changing of the politics or economics of the OPEC producers, or has technological anvances in other places lowered the marginal costs of producing that last barrel of oil we are getting? I do not know. When oil prics drop, oil demand will increase. Oil production will increase. I have heard industry CEOs state tongue in cheek that dropping oil prices will help them. I think there is more to it than meets the eye. Where in the world will the oil come from? Which wells will become unprofitable? Where will the oil services dollars be spent? Production will remain high and depleted oil will need to be replaced. If expensive oil can be replaced with cheaper oil, it will also be replaced. So, you tell me, please -- at this price or slightly above, where does drilling continue and where does exploration continue? Exploration quantity is based on volume of oil required, exploration location is based on oil price. Now, if the price issue is causing E&P budgets to be cut in the gulf or in other places, (not sure that it is really -- except in a few isolated cases??) it tells me that those locations are not quite profitable at the expected oil prices levels over the life of the wells. Does that say that the oil production increases must come from OPEC cranking it up? OPEC market share goes up and then they can control pricing more effectively. Prices go up... Make sense? Too basic? Too confusing? Hope it helps and eager to see your replies.

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