Crude oil is getting awfully expensive – to produce. According to a report from Bernstein (via FT Alphaville), the marginal cost for a barrel of oil rose 11 per cent in 2011, year-over-year. While that's in line with average recent growth, it brings the cost to an astounding $92 (U.S.) a barrel. As the analysts note, another double-digit increase this year will push the marginal cost of production above $100.
The analysis excludes the OPEC-producers (where crude oil can be considerably cheaper to get out of the ground) and much of the former Soviet Union as well, focusing instead on the 50 largest listed oil and gas companies – but it still has profound implications not only for energy stocks but for the low end of crude oil prices. The price of oil has bounced between $95 and $110 a barrel over the past six months. On Wednesday, it traded in New York at $105.36, down 80 cents.
"While we see near-term downside to oil prices on weaker demand growth, the longer term outlook for higher oil prices continues to be supported by the rising costs of production," Bernstein analysts said in their note.
Oil producers have been struggling, and these rising costs help explain why. The 13-member NYSE Arca Exchange Oil index has fallen 11.3 per cent over the past 52 weeks and is up just 0.6 per cent this year. Canada's S&P/TSX energy index, which includes gas producers and explorers, has done even worse, falling nearly 18 per cent over the past 52 weeks.
David Berman