Fracking and the Oil Price

Fracking and the Oil price
Andre Willers
4 May 2012
Synopsis :
The Oil price will permanently (100 years) be lower to a new sustainable level . We try to calculate the boundaries of this price from basic principles .
Discussion :
Fair price : what the price should be taking into consideration profits , reserves and exploration reserves . There is an extra value , which represents the present value of future demand (ie speculation) . This collapses to zero as fracking becomes commonplace .
See Appendix I
On recalculation (allowing for 5% pa inflation over 5 years) , the costs become :
Oil per barrel at the well-head : $6
Transport per barrel anywhere on-planet : about $6
Total cost per barrel at refinery : $12 =(6+6)
Markup factor about 200% : cost per barrel about $36= (12+2*12) .
This is the historical markup . Also the optimal markup . See http://andreswhy.blogspot.com "Optimal Markups"
To pay for the infrastructure of refineries , garages , etc

The argument goes that adding provision for reserves and the optimal markup on these reserves gave a fair price as long as petroleum was the only source .

Logically speaking , this gives a lower boundary of about $36 .per barrel . The upper boundary would be the optimal markup (200%) ie $72 per barrel .

Fracking reserves are well known and accessable .
Removing them from the cost reserve structure results in a much lower oil price per barrel .

Exeunt America from the Middle East .

The probability (95%+) is that the oil price will fluctuate between $36-$72 per barrel , with competition driving it to the lower levels ,

Environmental concerns will take a very back seat .

The USA will become a net exporter of energy (surprise!) .

Global warming :
This technology will exploit the methane clathrates on the seafloor . Preventing the dreaded cataclysmic methane surges .

Let one problem solve another one .

Andre

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Appendix I
This model held up fairly well . See other posts .
http://andreswhy.blogspot.com” Financial Crisis Dec 01 2008 : Petroleum Price “ Dec 2008

Basic ab-initio Cost Estimate of Petroleum Prices at 30 Nov 2008 .

Oil per barrel at the well-head : $5
Transport per barrel anywhere on-planet : about $5
Total cost per barrel at refinery : $10 =(5+5)
Markup factor about 200% : cost per barrel about $30= (10+2*10) . This is the historical markup . Also the optimal markup . See http://andreswhy.blogspot.com "Optimal Markups"
To pay for the infrastructure of refineries , garages , etc

The system needs reserves if it is not to die on us .
As discussed (See http://andreswhy.blogspot.com "Infinite Probes" )

There are two schools of thought :
1. General Reserves of about 1/3 of this gives cost per barrel about $40 = (30*1/3+30)

2. But we need reserves for exploration , which is expensive .
We use the optimal markup factor of 200% on $30 to $40 .
This gives us price boundaries of $60 to $80

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