RE:Oil productionFarmer12 wrote: The price of oil may at some very rare brief moment reflect the marginal cost of production. It always depends on the time span under consideration. Check the 50 year historical monthly oil prices on macrotrends. Other factors always intervene, geo-political, budgetary, local politics, environmental, lag times etc., particularly in the OPEC gulf states, where the marginal cost of production could be less than $10 in some cases. Oil is a political, critical commodity very susceptible to manipulation by influences unrelated to the marginal cost of production, such as political alliances, pressures or cartels.
True. The price of oil fluctuates for many reasons but there is a natural tendancy for the price to move back towards the marginal cost, up or down depending on what is happening. And this is why I made the comment if people see a price spike due to temporary situations, take advantage of it and don't get sucked in by manipulators like Goldman and JPM
In the case of OPEC that is why I referred to the social costs. Especially in Saudi Arabia, the House of Saud has many social programs that need to be paid for through oil revenues. I have seen estimates as high as in the 80s when these costs are taken into account. In this regard, what is a strong case for companies like SU is that they have driven down down their marginal cost below the full marginal cost for the Saudis and to a lessor extent the other OPEC countries.
So this means that SU will continue to achieve outsized FCF as long there is a demand for oil at at least current levels and they can maintain production which due to upcoming approvals which are needed is not a slam dunk. The problem as I have repeatedly posted is that the SP doesn't reflect this and IMO won't until SU changes its strategy and uses some of its FCF to diversify into meaningful non oil growth projects as opposed to buying back shares.