Costs of Oil and Consensus

What is meant by "internalized costs"?

Internalized costs are the costs which can be accurately accounted for in our current systems. In energy production, these costs typically consist of capital costs, financing costs, operation and maintenance costs, and exploration costs. Some energy options incur these costs in various stages such as extraction, transportation and refinement.

It is also very important to mention that profits and taxes will be excluded in order to isolate only the costs. This has a large impact on the final conclusion, especially in the case of oil. Global oil prices have hovered just above $100/barrel for some years now, but a lot of oil can still be produced for a tenth of this cost. The reason for this is of course that oil is such a highly tradable commodity, implying that global market prices will always have to be at least as high as the most expensive production cost. Naturally, this results in very large (taxable) profits for those controlling low-cost oil resources.

Profits and taxes levied on cheap energy can bring great societal benefits in terms of economic growth and public services. Yes, these profits can be wasted by building palm shaped islands or desert ski slopes, but it can also be invested abroad to drive global development (e.g. tiny little Norway's oil fund now controls 1.3% of the global stock market).

Internalized costs of oil

The International Energy Agency has made my work very easy by compiling the cost curve for global oil reserves shown below. It is important to note that the cost range given on the y-axis is for producing liquid hydrocarbon final fuel and includes extraction, transport and refinement.

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Naturally, most of the currently produced oil comes from the cheap conventional variety. A breakdown of current oil production is given below:

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It is clear that about 90% of global oil production is still in the form of conventional crude and NGLs. About 40% of this crude oil supply comes from OPEC countries (classified under the cheap "MENA conv. oil" in the above figure). Thus, as an example, if we assume that 40% of global oil costs $20/barrel (MENA), 50% costs $40/barrel (other conventional) and the remaining 10% costs $70/barrel (unconventional). The global average cost of liquid hydrocarbon final fuels comes to about $35/barrel.

Breakdown of oil consumption

We most commonly associate oil with gasoline and cars, but, in reality, only about half of global oil production (53%) is used in the transportation sector (BP Energy outlook). The rest is used for industrial (30%), residential & commercial (12%) and electricity generation (5%). Roughly a third of industrial oil consumption goes to the petrochemical industry. The remaining 20% of industrial oil consumption together with the residential & commercial use is mostly used for heating purposes. Thus, the approximate breakdown of oil use for energy is as follows:

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We will take a very brief look at all three of the above elements:

Electricity

According to a Fraunhofer analysis comparing PV costs to oil power plants, utility scale plants cost about $1000/kW, have O&M costs of about $0.04/kWh, operate at about 40% efficiency and at a capacity factor of about 85%. We will assume a low weighted average cost of capital of only 5% in order to remove profit-taking in the financial industry.

Under these assumptions, the cost of oil-fired electricity as a function of the liquid hydrocarbon final fuel cost is shown below. The Excel datasheet used to create this figure can be accessed here

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Transport

One barrel contains about 159 litres (42 gallons). Based on this information, the cost per volume for liquid hydrocarbon final fuel is shown below.

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Heating

Energy from oil for the purpose of industrial, commercial and residential heating can also be estimated as for transport from the knowledge that one gallon of liquid hydrocarbon final fuel has a heating value of about 0.114 MMBtu (0.12 GJ).

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Commenting

In order to assist in finding the consensus view on the internalized costs of oil energy, please follow these simple commenting guidelines:

Three types of comments are welcome, each introduced by a keyword:

  1. DATA: Please give your view of the current global average internalized cost of oil energy in $/barrel of final fuel with a brief outline of the reasoning behind your estimate. Each DATA comment will be weighted by the number of "likes" when the data is ultimately processed.
  2. REBUTTAL: If you strongly disagree with an existing DATA comment, please write a short rebuttal. The "likes" received by a REBUTTAL comment will subtract from the "likes" of the DATA comment. A REBUTTAL comment can once again be rebutted to reduce its weighting.
  3. CORRECTION: If you see a serious error in the numbers presented in the above analysis, please correct me (with a reference if possible) so that I can correct the article.

Miscellaneous guidelines:

  • Make sure your comment gives only one piece of information (use multiple comments for multiple pieces of information).
  • Keep things short.
  • Please try to be as objective as at all possible. For this process to work, we all need to be in the mindset of dialectic instead of debate.
  • Externalities and other energy options are off-topic. 

Many comments are welcome. More data = greater accuracy.