MB-502-Q1213 Cole Callahan Final Project Milestone 2.docx

MB-502-Q1213 Cole Callahan Final Project Milestone 2.docx -...

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Micro and Macro Economics of Oil Cole Callahan Southern New Hampshire University
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The mechanism for retrieving oil from the ground seems simple, at least in cartoons. One dons a ten-gallon hat, heads off into the wilds of Texas, pokes a hole in the ground, and the oil spouts forth from the earth; the geyser showering the new millionaire in liquid gold. As much as we all wish the process were that simple, oil production is costly and slow just like any resource development. The three main factors that contribute to the costs of producing oil are the finding costs associated with identifying potential land and proving that it will produce, the equipment for both drilling and completion, and the personnel expenses to staff each well. As a result of each oil well’s unique characteristics, each one of these inputs is variable aside from the oil finding. Oil finding refers to refers to the “average costs of adding proved reserves of oil and natural gas via exploration and development activities and the purchase of properties that might contain reserves” (U.S. Energy Information Association, 2011). These costs are typically measured in the cost of barrel of oil equivalents (BOE) and are highly dependent on the geology of the land surround the well. The costs associated with this process can vary greatly as the methods used to explore are dependent on whether the well will be onshore and offshore. For onshore exploration, it can be as simple as testing the subsoil, but when the potential oil field is offshore, exploration must be done “using sophisticated technology such as seismic imaging” (Business & Economics Research Advisor, 2013). These are all risky prospects, because after all of this is done, it may be proven with exploratory drilling that the well is dry and all costs incurred at this point will be a loss. Because the finding cost is fixed, it is spread across each barrel of oil produced in the future and the longevity of each well helps make the upfront cost have less of a long-term impact.
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The equipment for drilling is also dependent on the situation in which it is to be used.
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  • Fall '16
  • Economics, Drilling rig, U.S. Department of Energy

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