Iran sanctions lifted: Brace for oil shakeup

In a competitive market, euilibrium price is the marginal cost of production ie the cost of the last barrel of oil, not the first. In this case, the last barrel produced is tight oil that costs $50+/bbl to bring to market.

Sorry for the fact that my reddit post was not formatted and written to the standards of a journal submission, but marginal price is EXACTLY what I was talking about:

  • US frackers and horizontal drillers were recently pumping oil at a cost range of about $35~$60/barrel. Meaning there is still plenty of marginal production capacity at $50/barrel, meaning that the cartel would have to hold at that price to keep oil there (which it so far has been unable to do).

  • Gulf oilfields have production costs that obviously vary, but there are maybe half a dozen countries that could produce oil below $20/barrel. Again, the only way to keep the marginal cost ABOVE that threshold is if a cartel holds.

No cartel, no supply-restriction, and those who can produce cheaper will do so until demand forces the price up. The demand for oil is not going to outstrip oil that can readily be harvested at ~$50/barrel for a very, very long time.

There is a lot more detail and math and many many pages of equations can be spent (and have been spent) on discovering the true supply/demand model curves under different assumption scenarios, but my round numbers are fairly accurate (if not very precise) breakpoints.

The old reality is that the equilibrium price for oil is around $20, and has been for a long time, except that supply was restricted by cartel.

The new reality is that a seperate supply has emerged that can produce oil at an equilibrium around $50 (and dropping), and the cartel has broken.

/r/Economics Thread Parent Link - money.cnn.com