by David Fessler, Advisory Panelist
Oil is trading well over $70 a barrel - at its highs for this year - and just off nine-month highs of $73.20, seen last October 21, oil has been steadily rising. Oil prices have risen nearly 100% since their $38 a barrel lows seen last January.
Unfortunately - at a time when consumers can’t afford a wallet drain - retail gasoline prices across the United States have risen to $2.55 a gallon on average, and over $3.00 a gallon in places like California.
As you drive by the gas station and see the now familiar price changes - sometimes by the hour - you might wonder what’s really affecting the price you pay…
Investors, of course, want to know if there’s a good way to play the price moves. Let’s take a look at the two biggest drivers of oil prices and ways you can play its movements.
Oil Prices Rise As Production Costs Vary Widely
As with any natural resource we use, crude oil has costs associated with its production that are relatively clear, but nonetheless can vary widely.
Those variations come about almost entirely based on where the oil is. Since we’ve been using the black goo for nearly 100 years, it stands to reason that most of the easy, cheap oil deposits have already been found.
Taking a look at the costs to even find the stuff:
- You’ll find deep-water exploration is far more expensive than land-based exploration. You need a sizeable exploration vessel, capable of operating in some of the world’s angriest oceans for months at a time.It has to be equipped with highly sophisticated instrumentation and software to be able to “see” potential crude oil deposits as deep as seven miles below the surface of the ocean. You also need a crew of mechanics to keep it all working, and petroleum engineers and geologists to interpret the data.
- Land-based exploration - on the other hand - can be done from a well-equipped van, by one or two petroleum geologists.Then there’s production costs: land based oil is cheap to drill for. Land-based drills can fit on the back of a few tractor-trailers and can be torn down, moved and setup at a new location with relative ease. In addition, it’s much less expensive to extract.
Land based production is definitely preferred. Unfortunately it’s not where the big new finds are made.
As you go offshore into deep water, things get expensive fast: deep-water extraction is a financially losing proposition with prices anywhere below $75 to$80 a barrel, compared to as little as $25 to$30 a barrel for some land-based deposits.
But exploration isn’t the only cost of crude oil.
