Oil Price may drop to $10/barrel

Last year, I posted a blog Oil Price will settle at around $35 predicting that oil will stabilize (on the medium term) at $35/barrel. On 14 December, the price of Brent oil was below $38/barrel. So, will the oil price finally settle at $35/barrel? Yes, but not right away. The nature of markets is that they tend to overshoot equilibrium points. Thus, the price will probably overshoot downwards; resulting in short-term prices well below equilibrium.

The limits of this is determined by cost. The average cost of producing oil is $35/barrel – with $25 as the price of development, and $10 the price of extraction.  The costs differ, based on the particular method of producing oil. Land-based shallow wells cost less than $25/barrel to develop; and also less than $10/barrel to pump. Deep-sea wells cost $50 or more to develop, and $10/barrel to pump. Oil from tar sands cost very little to develop, but $50/barrel or more to extract.

The present situation of every producer pumping as much oil as they can would mean that the price would continue to drop below $35 (at least in the short term). Since production from existing wells continue to be profitable (i.e. the price of the oil is higher than the marginal cost of production); owners of those wells will continue pumping oil. They will do so until the price reaches $10/barrel,  the point where it will be more profitable to stop producing (for a large number of wells).
This means that, in the short term, the oil price could reach as low as $10/barrel.

This is only for the short term, however. After a while of oil at extremely low prices, when little or no new wells are drilled; the total oil produced will decrease because the depletion of existing wells is not compensated by production from new wells. The lower production will drive prices up, until it reaches the point where it would again be profitable to drill new wells.
Thus, the price will gradually rise, until it finally would stabilize at about $35/barrel.

In the long term (more than 5 years), the average cost of production would inevitably increase, as cheaper sources of oil get depleted. Thus, more and more, deep-sea wells and tar sands will take on a bigger proportion of the total oil produced. This will raise the average cost of production, meaning that the equilibrium point will rise.

In short, here are the projections for the oil price:
– short term (6 months to a year): as low as $10/barrel
– medium term (2 to 5 years): stable around $35/barrel
– long term (more than 5 yearsr): price will rise gradually, reflecting rising average production costs.

Poor Farmers Appeal for a Tractor

Palimbang (in Sultan Kudarat province) is a very poor town, with up to 45% of the people living below the poverty line. Its people have become poor because of war, and had lost hope.
The people of Palimbang have suffered a lot as a result of the Moro wars. The fighting made them evacuate repeatedly; harvests failed resulting in debts and eventual loss of the land. Also, a lot of land was left idle.
Since 2005, Pasali has been working with the people of Palimbang. It has undertaken projects in which Christian settlers, Moro, and indigenous Manobos worked together on projects to improve their lives. Pasali has set up water installations in some communities, helped Manobo children go to school, organizing the rice farmers into associations, and trained them on improved agricultural techniques. It also runs a modest pool of farm machinery: two hand tractors and a rice thresher.
Pasali has introduced the technology of SRI (System of Rice Intensification) which uses 50% less water, organic fertilizer and natural pest control; which costs less and has resulted in richer harvests. This would result in higher net incomes for farmers, and potentially could lift many of them from poverty.
In 2011, the Palimbang Tri-people Organic Farmers Association (PTOFA), asked Pasali to help them acquire farm machinery. Specifically, they needed a Tractor and a Rice Harvester, which can work on at least 125 hectares of land. The machines will be managed by PAIS (Pasali Agricultural Innovations and Services), PAIS is a social business, which will reinvest all of its profits in expanding its services. PAIS will train and manage the tractor operators, and ensure that it is maintained properly.
The combination of agricultural machinery and SRI technology will raise the yield per hectare from 40 cavans for traditional methods (which is what many poor farmers use) to 120 cavans (which PAIS has already attained on land it directly manages).
We are appealing to you to help acquire the Tractor for the poor farmers of Palimbang. Every contribution will help, no matter how small (minimum contribution is 5 Euros, but of course it could be more).
The Project’s link is at
https://www.pifworld.com/en/projects/FarmersoutofPovertythruMachinery/2357
Stichting Pasali