Before 2015, the cost of exploration, developing and extracting oil added up to some US$30 per barrel but there are other extras that also need to be factored into the price, such as required margins and transportation costs. All in, the breakeven point for oil production companies pre-2015 was around US$47. This means at US$70 a barrel companies were able to earn a 15% return and still have a cash margin of US$2.15.
Today, post company cutbacks and lower transportation costs (a result of more pipelines), different assumptions must be made to work out the breakeven cost per barrel for oil companies. A more realistic figure today is closer to US$35 per barrel. So even with oil as low as US$52 a barrel, companies are able to generate the same returns and thus grow supply. Given these estimates the industry is likely to continue to be able to absorb lower oil prices, supported by deflationary cost pressures, and as a result they could remain under a US$70 ceiling for some time to come, if not indefinitely.
Robin Wehbé – The Boston Company Asset Management, a BNY Mellon company