production costs saudi ace hole
Industry

Production Costs are a Saudi Ace in the Hole

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The continuing watch that comes with stagnant oil prices is usually fixated on Saudi Arabia, given its nearly half-century run of exploiting its geography that allowed trillions of dollars to find their way into government coffers. With no signs of any dramatic shift upward when it comes to oil prices, some alleged experts believe that the Saudis are living on borrowed time as an economic power.

However, the reality is that oil prices could still be cut in half from where they’re currently situated, roughly near $50 per barrel, and the Kingdom would still be making a profit on its still-precious commodity. The reason for this phenomenon is that the production costs still amount to just $9 for each barrel, a number that’s half of what occurs in Russia and the United States, and three times what it takes to deliver oil in both Canada in Venezuela.

Such low costs are because drilling for oil in Saudi Arabia doesn’t require setting up new production areas across the country and offshore. Instead, oil-rich areas tend to be situated in specific areas that don’t require much additional investment. That’s in direct contrast to Canada, which attempts to make money from their oil sands. The dwindling lure of finding oil has been dimmed enough that countries like Shell have bailed out.

Technically, this price difference is enhanced because the Saudis don’t assess taxes on domestic oil production. That’s primarily due to the simple fact that the Kingdom, through Saudi Aramco, runs such production. The profits accrued over time have been funneled to social projects, though cutbacks here could spark unrest if they remain intact. In short, the Saudis aren’t hurting, but they need some sort of jumpstart in the market to keep their populace content.

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