Profitability and Breakeven Price for Oil

Profitability and Breakeven Price for Oil - Profitability...

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Profitability and $100 oil by Steve Austin - 2008/01/05 $100 per barrel: the line was finally crossed on January 2nd 2008. What does this imply for profits of oil producing nations? In order to run some numbers we have to consider a key measure called the break- even price which is the amount of money it takes to extract 1 barrel of oil . The break-even price is the first thing oil companies establish in order to determine if drilling a new well makes financial sense. From the break even price, profitability can easily be determined with the following formula: Profitability = (Price of Oil - Break Even Price) / Break Even Price For example with oil at $100 and a break even price of $50, profitability is 100%. But with oil at $60 and the same break even price, profitability drops to 20% By dialing their target profitability first, oil companies then determine if a new drilling project is feasible. Needless to say, with oil retailing now at $100, more wells will be drilled in deeper, harder to reach
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This note was uploaded on 02/12/2010 for the course ECON 201 taught by Professor Smith during the Spring '10 term at Whittier.

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Profitability and Breakeven Price for Oil - Profitability...

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