Something To Think About: Break-Even Prices Decline When The Price Of Oil Declines -- January 18, 2015

On  December 10, 2014, with regard to the cost of bringing oil to market, I wrote:

The break-even point is somewhat irrelevant in big scheme of things for reasons I have discussed before. 

This is why: the "break-even" point is a moving target. On what date did the analyst determine the break-even point and on what basis did the analyst determine the break-even point for what date in the future?

Anyone who has followed the oil industry for any length of time knows that the break-even price declines as the price of oil declines.

That was the point I was trying to make in my post of December 27, 2014 when talking about IRRs. It's all relative; it all depends.

I did not expand on that point at the time for several reasons, only of which I will mention: I knew I could not explain it as well as others could, so I was waiting for others to write about it.

I was glad to see that not only did Rigzone/Wood Mackenzie write about it, but they listed it first among a dozen or so data points or thoughts about the current slump in oil prices.

Upstream costs are the silver lining for operators: As companies have decreased capital budgets, we are seeing a slowdown in drilling activity. This reversal is already having an impact on the demand for rigs, pressure pumping fleets, and other key equipment and services. If the oil price were to average around $50/bbl in 2015, we anticipate a 40% decline in the horizontal rig count compared to 2014. Rig day rates could fall by 30% or more.