"I refer to your recent item on oil/gas riches in the Gulf of Mexico.
"As these are at great depth, the recovery cost must be very high. This should help to place a floor under the oil price
"Any idea what cost of production would be? Maybe one of the energy experts, who read Fullermoney may wish to contribute."
David Fuller's view Thanks for a relevant email of general interest.
My guess is that only the oil companies involved know approximately what the eventual cost of production is likely to be. However, we do know a big portion of it, in that figure of over $100 million to drill each of these deep wells. Fortunately the success rate is high and they are already certain that the resource is massive, according to the article. Additionally, the increased drilling activity confirms the optimism of these large oil producers.
I think it is fair to assume that the cost of drilling and producing from these wells is on a gradual downward trajectory in real terms, thanks to technological innovation. Thereafter, the crucial variable is the actual market price of oil, for which I will use Brent as a relevant benchmark. Obviously no one knows what the price of oil will be a few years from now, although my guess is that it will be somewhat lower in real terms towards the end of this decade, due to increased energy production in all forms. Of course the demand for energy should also be rising, so I am anticipating a significant increase in production.
If I am wrong and the cost of oil actually plummets due to some dramatic event or perhaps a combination of factors, then drillers will cap uneconomic wells until the price rises once again. Similarly, some other forms of energy production would most likely also be curtailed. Ironically, the biggest known threat to commercial oil prices, in my opinion, would be a widespread increase in onshore fracking of oil and especially gas. I believe this would be in the long-term economic interests of countries because it would reduce their need for energy imports and make them more competitive, as we have seen with the USA. However, the combination of political resistance to fracking or at least apathy in terms of mastering the technology is helping to keep energy prices high, at a cost to GDP growth.