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October 14, 2008, 10:32 am
Crude Counting: How Much Should Crude Oil Really Cost?
Posted by Keith Johnson

.... If past really were prologue, oil should bottom out at $35 a barrel. But in today’s world, $60 is the new cheap—and also far too cheap for OPEC’s liking, which will likely keep output tight and oil above $90 a barrel ....

... oil producers won’t produce if it costs them money. Deutsche Bank figures the most expensive barrels to produce today cost about $80 a barrel, making that a natural floor. Not that oil-patch economics can trump oil-country politics: Countries like Saudi Arabia, Venezuela, and Iran rely overwhelmingly on oil revenues, and need oil at between $55 and $95 a barrel to balance their budgets.

Prices may overshoot to the downside, and we may see $50/barrel in the near term, but I'd bet prices stabilize in the $60-$80 range. I doubt we'll see $35/barrel again. Oil producers will not produce at prices that are below the marginal cost of production. If producers don't produce, demand will outstrip supply, and the price will rise until it at least meets the marginal cost of production.

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