6
6 SUPPLY FUNCTION
The supply cost function (Figure 1) is a schematic illustration of the average production
costs in 2014 for existing production. The main beneficiaries of high oil prices are the oilproducing countries, above all the members of OPEC. The gap between the world market
price and the average production costs for crude oil has been widening for several years. As a
result, the oil states are generating increasingly higher revenues. This is particularly evident in
Saudi Arabia, where production costs are particularly low at around USD 25 per barrel. Oil
sands and US shale oil are at the top of the cost curve and are the so-called border suppliers.
After the drop-in oil prices at the beginning of 2015, Canadian oil sands, parts of shale oil
production are uneconomical.
The long-term supply function established on the basis of discrete partial supply quantities
is brought to an intersection with the continuous demand function (assuming an atomistic
demand function) (von Wahl, 1991). Under the previously set condition of the ideal market
at the intersection of the two functions, one obtains a) the competitive or equilibrium price
(as a unit price) for all supply and demand quantities in the competitive part of the market
spectrum (to the left of the intersection) and b) the competitive supply quantity.
7 PRICE DEVELOPMENT
From the middle of the past decade to 2014, there was a worldwide boom in raw materials,
triggered in particular by rising demand from Asia. This resulted in enormous investments in
the development of new oil fields. Especially in the USA, supply has increased due to technologies such as fracking, but production has also increased in the Middle East and Russia.
In the summer of 2014, the North Sea variety Brent cost over 100 dollars per barrel (159
liters). In the meantime, the price of the world’s most important raw material has risen again
to around 65 dollars following a crash to below 30 dollars at the beginning of 2016. Because
oil is traded worldwide, the price in the USA and Asia has fallen almost as sharply as in
Europe.
According to the US Energy Agency (EIA), global consumption amounted to 96 million
barrels per day in 2014, production to just under 94 million barrels, and the opposite was
true in 2015. An important reason for this was that Saudi Arabia decided in autumn 2014 not
to produce less despite falling prices due to overproduction. This sent the oil price onto the
accelerated downward spiral. Currently, global oil production continues to exceed demand.
Stocks are filling continuously.
Figure 1. Global cost curve 2014, schematic illustration.
Average cost (USD/bbl)
70
so
30
oj
:.0:.0
10
::s oj
"' ....
r:/J<:t:
20
40
Production (mbbl/d)
60
85
6 SUPPLY FUNCTION
The supply cost function (Figure 1) is a schematic illustration of the average production
costs in 2014 for existing production. The main beneficiaries of high oil prices are the oilproducing countries, above all the members of OPEC. The gap between the world market
price and the average production costs for crude oil has been widening for several years. As a
result, the oil states are generating increasingly higher revenues. This is particularly evident in
Saudi Arabia, where production costs are particularly low at around USD 25 per barrel. Oil
sands and US shale oil are at the top of the cost curve and are the so-called border suppliers.
After the drop-in oil prices at the beginning of 2015, Canadian oil sands, parts of shale oil
production are uneconomical.
The long-term supply function established on the basis of discrete partial supply quantities
is brought to an intersection with the continuous demand function (assuming an atomistic
demand function) (von Wahl, 1991). Under the previously set condition of the ideal market
at the intersection of the two functions, one obtains a) the competitive or equilibrium price
(as a unit price) for all supply and demand quantities in the competitive part of the market
spectrum (to the left of the intersection) and b) the competitive supply quantity.
7 PRICE DEVELOPMENT
From the middle of the past decade to 2014, there was a worldwide boom in raw materials,
triggered in particular by rising demand from Asia. This resulted in enormous investments in
the development of new oil fields. Especially in the USA, supply has increased due to technologies such as fracking, but production has also increased in the Middle East and Russia.
In the summer of 2014, the North Sea variety Brent cost over 100 dollars per barrel (159
liters). In the meantime, the price of the world’s most important raw material has risen again
to around 65 dollars following a crash to below 30 dollars at the beginning of 2016. Because
oil is traded worldwide, the price in the USA and Asia has fallen almost as sharply as in
Europe.
According to the US Energy Agency (EIA), global consumption amounted to 96 million
barrels per day in 2014, production to just under 94 million barrels, and the opposite was
true in 2015. An important reason for this was that Saudi Arabia decided in autumn 2014 not
to produce less despite falling prices due to overproduction. This sent the oil price onto the
accelerated downward spiral. Currently, global oil production continues to exceed demand.
Stocks are filling continuously.
Figure 1. Global cost curve 2014, schematic illustration.
Average cost (USD/bbl)
70
so
30
oj
:.0:.0
10
::s oj
"' ....
r:/J<:t:
20
40
Production (mbbl/d)
60
85