Again: It's The Cost of Producing That Last Barrel That Drives the Price

The price of oil is not set by the cost of producing the first barrel (about $5/barrel in Saudi Arabia); the price of oil is set by the cost of producing the last barrel (about $60/barrel for Canadian oil sands). That puts the price of oil in a trading range between $60 and $80 based on the strength of the dollar.

I don't know where I first heard that, but I last posted that just a few weeks ago. 

I came across that maxim yet again tonight, reading that oil companies are ready to go back into the Gulf of Mexico.

Chevron, Exxon, Royal Dutch Shell are willing to endure the additional time to secure permits and extra costs that will result from new government regulations because they've come to depend on deepwater drilling to replenish their reserves.

These big oil and gas companies know the geology of the Gulf much better than other parts of the world.

Wells in the Gulf can be very profitable. Drilling projects there typically break even when oil sells for $50 to $60 per barrel. It's currently trading near $82 per barrel.

Yup, it's the last barrel of oil produced that drives the price of oil. With increased government oversight and regulations, the cost to produce oil in the GoM will probably increase.

By the way, most of the Bakken companies say it costs $14 - $20 to produce a barrel of Bakken oil. This may or may not include the $6 - 8 discount from West Texas Intermediate, the benchmark, and the cost of shipping the oil to the refinery. Reading "tea leaves" suggests the Niobrara cost may be less, at least in some areas.