What is the True Cost of a Barrel of Oil?

This morning I was having coffee with another geologist and this question that has been nagging me for a long time raised its ugly head. What is the true cost of a barrel of crude oil? This is a simple question, but I am of the suspicion that the answer is complicated. I am putting this out here to hear what others have to say about it.

When I started working for an operator in the oil and gas industry, an older gentleman who was mentoring me told me to start getting ready for layoffs by saving part of my salary. He said, "When the times are good, they are good, and when they are bad they are very bad." He reminded me that he had been through a couple of circles of booms and bursts; this has taught him that the oil industry is highly unpredictable.


A couple of years after we had this conversation the recent slump in the oil prices hit and true to his prediction the massive layoffs followed. Groves and Co. report that by August of 2015 about 600,000 workers in the oil and gas industry had lost their jobs. This is a huge number when you factor in the families represented by these hundreds of thousands of workers.

Are layoffs part of the problem we are having this repeated cycles of booms and bursts? What if companies were unable to use layoffs as part of the solution when hard times hit? What will the true price of a barrel of oil be if all who are involved in exploring, exploiting and producing the oil were factored into the cost over the entire life of the field?

I am not in any way suggesting, price control or job guarantees or discounting the role of demand and supply. The issue is that the oil and gas industry has a knee jerk reaction when the going gets tough and massive layoffs seem to be the "expected solution." It is common to hear the in charge say, "Prices are low, and we cannot afford to keep a large workforce. What is driving these low prices? Are oil and gas companies costing the barrel of oil at the discovery in the "right way?" Do these companies factor in layoffs as part of the initial pricing? The actual cost of the price of a barrel of oil should include the cost of layoff the hundreds of thousands of workers who have been laid off not because of poor performance, but because of the fall in oil prices.

We can "afford to pump cheap oil" today maybe because we do not know the "true cost of the oil." Are we selling our oil too cheap because we do not cost it appropriately? If it was not possible to layoff all who participated in getting the oil to the refinery, would we price a barrel of oil they way it presently is and has historically been? It is a big challenge to factor in the human element long term and as long as layoffs are an anticipated and accepted method to deal with low prices, the cycles of booms and bursts will continue, with all the undesirable consequences on the entire industry. The oil and gas industry can do better.

Your comments and suggestions are welcomed. Dr. Eric Tangumonkem was born and raised in a Caldera on the Cameroon Volcanic Line in Cameroon. In addition to being a geoscientist with extensive experience in the oil and gas industry, he is a teacher and an entrepreneur. Currently, he teaches for Missional University, Embry Riddle, and West Hills College. He is also the President of IEM Approach a premier personal growth and leadership development company based on the infinite wisdom revealed over the ages. On a mission to inspire, equip and motivate people from all work of life to find their God-given purpose, pursue and possess it. He also educates people on, life Insurance, Disability Insurance, Annuities, Long Term Care Insurance, Wellness Programs and Tax-Free Retirement Plans. 


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