Oil Trouble

With prices as high as they are, does that mean companies can now drill deeper for oil that was once too expensive to exploit? Does a region like the Canadian tar sands become more economical?
Not necessarily, because the cost of developing oil fields has doubled over the last few years. Also, many governments have increased "state take": the amount of revenue they get from oil-producing activities. An oil price of $90 [a barrel], which a few years ago would have been a clear, unambiguous signal to invest more and more, [does not necessarily have that effect] today. Because of higher cost and higher state take, the investment equation is not that simple.

When you say higher cost, what does that consist of? Is that because companies are drilling deeper or because it's harder to extract the oil from the shale or the sand it's embedded in?
It's a reflection of the fact that there's been a surge in the demand for the services needed to find and develop oil. So whether you are leasing a deep-water drilling rig or trying to attract welders to Alberta, the demand for those types of services has surged so much that it's placed significant upward cost inflation.

And yet we hear about oil companies making record profits. They can afford to do this, right?
It depends. Profits today are a reflection of investments made many years ago, when oil prices were much lower. When companies are looking at new investments, the investment dynamics are different today than they were in the past.

From an environmental perspective, the higher oil prices are a good thing because they will discourage people from using it.
One-hundred-dollar oil creates a strong incentive to use oil more efficiently, yes.

And what are the other knock-on effects of $100 oil?
It brings us closer to the point where oil prices could contribute to a significant economic slowdown. Keep in mind that the year-to-date annual oil price is just $70; it's not $100, or even $90.

That's when you average it out over the year.
Yeah. So we haven't been in a $95 oil price environment long at all. And it takes time for these high prices to work their way through. The key to this is how long prices will stay at that level.