The economics of oil … continued.

A couple of week’s ago, I posted The economics of oil …  suggesting that countries such as Saudi Arabia were operating below breakeven with oil @ $40 per barrel.

 

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While technically correct, several loyal readers schooled me on the difference between “economic breakeven” and “fiscal breakeven”.

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First, let’s deal with “fiscal breakeven” … the numbers that I posted.

An oil-exporting country’s “fiscal breakeven” oil price is the minimum price per barrel that the country needs in order to meet its expected spending needs while balancing its country’s budget.

That is, since oil revenues fuel the countries’ spending on social programs, a drop in prices (holding volume constant) creates a government budget deficit.

So, “fiscal breakeven” is a bit of a mish-mash … production costs are relevant, but the big “plug” number is how much the country is spending on social programs.

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“Economic breakeven” relates more directly to to production costs.

So, for example, it costs Saudi Arabia about $10  to “produce” a barrel of oil.

Technical note: Even “production costs” are a bit of a mish-mash.  They include a mix of capital expenditures and operational expenditures.

Capital expenditures include the costs involved with building oil facilities, pipelines and new wells.

Operational expenditures included the costs of lifting oil out of the ground, paying employee salaries and general administrative duties.

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Putting the pieces together ….

At $40 per barrel, the profit margin on Saudi oil is about $30.

But, holding volume constant, the Saudis need about $86 in margin ($96 less the $10 production cost) to fund their lavish social programs.

Less than that and either social programs have to be cut or money has to be borrowed to fund the deficit.

Either way, it sows the seeds of social unrest ….

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I think I got it.

Thanks to readers for getting me pointed in the right direction ….

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