You have to hand it to the Iranian oil minister to grab the global petroleum industry’s attention with bold pronouncements. This time around, Iran oil minister Bijan Zanganeh was reported to have said that even if the global price of oil skidded to $25 per barrel, the industry will survive. Observers of Iran’s petroleum industry might be confused by this statement. After all, Nigeria, Venezuela, and Iran are generally regarded to have higher oil extraction costs than Saudi Arabia.
Not surprisingly, whenever the OPEC agenda turns to cutting back on production, it is almost always the Iranians and Venezuelans pushing for a Saudi production cutback. According to industry observers, Iran and Venezuela’s extraction costs are north of $60 to $85 per barrel. Given current prices, it is inconceivable that Iran would tolerate $25 oil for too long. After all, Iran’s public spending is funded primarily by its oil exports. With that said, what would $25 oil mean for the global industry?
Thanks to technical innovation, $25 oil might not necessarily be the industry death sentence some pundits consider it to be. Greater extraction capabilities can lead to higher productivity that lead to lower costs. It is worth noting that a lot of today’s extraction technology didn’t exist two decades ago. Moreover, modern extraction systems are more productive and cost less. This drives per unit extraction costs down. $25 oil might push industry players to pack as much technology in the extraction process to boost overall productivity, effectiveness, and lower manpower costs.
Of course, countries who are wedded to more traditional extraction processes would be the worst hit. Still, given the fact that oil gluts have happened in the past-most notably the mid-90s-the industry can survive $25 oil. The problem is there’s a big gulf between surviving and thriving.