Even At $30 A Barrel, Saudis Are Still Making Money On Oil

Transcript

ROBERT SIEGEL, HOST:

The price of oil has ranged from an all-time high above $147 a barrel in 2008 to just over $45 earlier this month. That goes for oil that is cheap to drill for and oil that's expensive to drill for. Obviously when the price of oil goes down, profit margins go down a lot more for expensive oil than for cheap oil. And at some very low market price, very expensive oil could be priced out of the market. So which oil is expensive and which is cheap? Well, joining us to talk about that is Amy Myers Jaffe of the University of California Davis Graduate School of Management where she does research in energy and sustainability. Welcome to the program.

AMY MYERS JAFFE: Thank you for having me.

SIEGEL: Saudi Arabia has pursued the policy of high production which has helped drive down prices. Is Saudi oil the cheapest oil, and do we know how cheap it is?

JAFFE: Well, Saudi Arabia has among the cheapest oil. I think, perhaps, in some parts of Iraq it could be even cheaper. But the Saudis - not only do they have oil that's very inexpensive to produce, they also have a lot of it - you know, 50 to 100 years worth of reserves. And they have to take a long view on making sure that there continues to be demand for their oil. And that is, I think, part of what this price war is about.

SIEGEL: But at $45 a barrel, the Saudis are still making a lot of money on every barrel of oil.

JAFFE: There is no question at $45 a barrel, and even at $30 a barrel. The Saudis are making a lot of money on every barrel they produce.

SIEGEL: And you said that Iraq may have oil in some places that's just as cheap.

JAFFE: So in Iraq, again, there are places where their reserves are so large and their cost to develop them are so low - you know, under $5 a barrel. But even though, Iraq is suffering now because they have a tremendous amount of financial pressure and budgetary pressure with mouths to feed, so to speak, and a war. But the bottom line is the level of profit for every barrel of oil that gets produced in Saudi Arabia or Iraq is a much higher margin than the measure of profit that goes for, say, oil produced out of the oil sands in Canada or in the Russian arctic.

SIEGEL: Well, we've just heard a story about drilling in the arctic up in Alaska or drilling offshore in the Atlantic. Would those places and the methods used there produce petroleum at very high cost or low cost?

JAFFE: Well, if you're talking about offshore Alaska, projects developed in the Arctic have turned out to have - much more expensive than people had imagined. And so it's risky business today.

if it is billed is very very expensive to extract. Is that way up there in the charts?

SIEGEL: And offshore in the Atlantic?

JAFFE: The deciding factor of how profitable that's going to be is how large are the reserves. If it turns out that the reserves are small - even though maybe the initial cost for exploration might be competitive to some other places in the world, unless they find big fields, the amount of money I had to spend to get, you know, one barrel of oil could still wind up being fairly high.

SIEGEL: Now, it's sometimes said that oil extracted from the tar sands in Canada - the oil that would presumably flow south through the Keystone XL pipeline once it's - if it is built - is very, very expensive to extract. Is that way up there in the charts?

JAFFE: There's no question that Canadian oil sands is on the expensive end of what it costs to produce oil. It's partly because you're talking about a complicated mining process. You know, on a scale of one to 10, it might not be 10 because maybe 10 is oil that's in a very extreme location like in the North Arctic, but it's certainly an eight or a nine on the scale of one to 10 of what is the most difficult, expensive oil to produce in the world.

SIEGEL: Amy Myers Jaffe of the University of California Davis School of Management. Thanks for talking with us.

JAFFE: Thank you very much for having me. Transcript provided by NPR, Copyright NPR.