Over the past several months I’ve ready many articles with various opinions on a “reasonable price for crude oil”.  Regardless of the source, or the magnitude of “reasonableness”, I often wonder: what’s so special about that number?

For instance, yesterday OPEC’s secretary general Abdalla el-Badri opined that “$70 to $90 per barrel is reasonable, as that range will support investment in new production”.

Well sure, if that new production costs less than $70 to $90 per barrel to produce.

The argument that el-Badri made was that OPEC controlled as much as 80 percent of the world petroleum reserves, and that they needed to develop that reserve “so we can have more supply to the world”.

I’m not sure that argument holds much weight.  Here’s why.

Ideally you want to have your production costs as low as possible so production is insulated against large price swings.  The lower the production cost, the longer the reserve will make economic sense to produce.

If you have high lifting costs for a substantial portion of your reserves, the the higher the chance you’ll have to shut in production due to the lower than production cost market prices.

The last thing you want to do is continually shut-in wells due to market volatility alone.  The drawback to that is that once prices rise above lifting costs, it will take a substantial amount of time to get production to market.  It’s not like flipping a switch on and off.

As we’ve seen in recent months, the effect of OPEC quotas, and their reduction, is questionable.  OPEC has cut hundreds of thousands of daily production, with no net result on the price of the commodity itself.

So what’s so special about $70 to $90 per barrel?

Ultimately that range makes development of unconventional reserves look more attractive.  However, with the balance of supply and demand shifting the scales in the other direction, raising the price of the commodity just to stimulate supply when demand can’t keep up doesn’t sound like a reasonable solution.

OPEC is set to meet again on March 15, and if crude prices are still hovering around $40 per barrel, you will surely see additional cuts in production.

To what effect will be interesting to see.

Energy commodity prices, crude oil, OPEC, supply and demand

Last Friday OPEC announced a cut of 1.5 million barrels of daily crude oil production as part of an effort to stabilize crude oil prices.  Evidently the commodity did not react as expected, shedding more than 7% more after the news.

It seems that the stability of the global economy is trumping anything OPEC can do to prop up the price of crude.  There is still a lot of money leaving the energy markets, either by force or lack of confidence.

Unfortunately, with every down day in the crude market, the foresight of alternative energy comes more into question. Everyone with a vested interest in developing alternative energy is starting to question the security of the decision to steer to wind, solar and other alternative energy sources.

As the price of gasoline slides, efforts from the likes of GM with the Chevy Volt seem to carry less of a return.

I think in the long run crude oil prices will start moving up again.  It’s just a matter of how long the alternative plays can ride out the dip.

Energy, Oil & Gas commodities, crude oil, OPEC

According to a report out on Bloomberg today, China is continuing its curb on vehicles put in place on July 20th to help with the pollution problem ahead of the Beijing Olympics, which apparently was quite effective.  The air quality is better now than it has been in over a decade, and in fact, pollutant levels dropped by as much as 50% during the Olympics.

The city will “seal off” 30 percent of government and Communist Party-registered vehicles Oct. 1, the Beijing government said on its Web site today. It will also limit the time the remaining government vehicles, as well as company- registered and private cars will be allowed on the roads, it said. -Source

The city of Beijing also put a stop to building work and shut down factories during that same time frame.

The effort is actually quite elaborate.  For instance, the last number of a license plate of each car will determine which days that car will be disallowed from the roads in Beijing. Social organizations and various businesses are shifting work schedules to stagger the traffic flow.

Unfortunately, this means that I won’t be able to gauge what effect this curtailment has on oil prices.  A while back, I mentioned that around the same time China took the cars off the road and shut in manufacturing facilities, the price of crude oil started dropping.

Now that Beijing is going to keep the curb in place, it will be tough to tell if this was all simply coincidence or if China’s demand for crude is actually a measurable quantity in this regard.

Crude oil is down $30 since the curb went into effect.

Energy, Environment China, crude oil, Environment, Olympics, pollution