(MENAFN - Khaleej Times) Saudi Arabia has the lowest cost of oil extraction in the world, just above 20 per barrel
In the late 1970s the United States decided to support the development of technology to tap shale gas and oil.
Steadily, the country was able to develop the technology necessary to reach oil and gas deposits that were previously inaccessible. Hydraulic fracturing or 'fracking' procedures have been gradually improved, reducing drilling time and cost.
According to the United States' Energy Information Agency, or EIA, in a note published in June 2013 ("Shale oil and shale gas resources are globally abundant"), the world has 345 billion barrels of technically recoverable shale oil which until not long ago were not available.
That additional amount is larger than the existing proven reserves in Saudi Arabia, which are estimated to amount up to 300 billion barrels. If these reserves can be tapped successfully, the current map of oil would shift substantially.
The International Energy Agency, or IEA, a think tank supported by Oecd countries, estimates in its 2013 energy outlook that the United States will be the top oil producer by 2015 on the back of rising shale production.
These developments have prompted a debate on the future role of Saudi Arabia, Kuwait, the UAE and Qatar in the energy field. Many analysts think that rising competition from shale oil will reduce the capacity of the region and, in particular, of Saudi Arabia, to prolong its current price-maker role in the energy markets.
A key factor is often absent in this debate. New technological developments have made the extraction of shale oil and gas economically efficient at current prices, but the extraction cost is still one of the highest among different types of oil.
The chart shows the estimated cost of producing one barrel of oil, including the investment in capital. Saudi Arabia has the lowest extraction cost in the world, just above 20 per barrel.
The proximity of its deposits to the surface allows an easy exploitation, while the dire size of its deposits (just the Ghawar field close to Bahrain holds more oil than the United States) creates economies of scale in infrastructure investments.
Similar conditions apply to the rest of the Gulf countries, Iraq and Iran, which can extract oil with only a minor premium over Saudi Arabia. Other sources of relative cheap oil like China, Libya and Mexico play a small role in international markets due to their limited exporting capacity.
China consumes domestically the 4 million barrels that are produced every day. Libya never fully recovered from the Arab Spring events and is currently exporting 100,000 barrels per day, compared to one million in July and more than 1.5 million before the crisis. Similarly, Mexico is reducing its exporting capacity: sales to the United States, destination of almost 90 per cent of the country's exports of oil, dropped from a peak of 1.5 million in 2004 to less than a million bpd in 2012, due to falling production and rising domestic consumption.
Most of the new discoveries of non-conventional oil involve much higher production costs. Oil from deep water extraction is at least three times more expensive than conventional GCC oil.
Production costs for shale oil in the United States and oil extracted from sands in Canada ranges from 70 to more than 100, five times Saudi Arabia's cost. Production cost estimates vary among analysts, but magnitudes remain widely similar.
These estimates in particular were calculated by Cambridge Energy Research Associates in 2008, but since then only the shale oil industry has witnessed a relatively significant change in technology and extraction prices have only come down marginally.
In spite of rising production, oil prices did not come down because the marginal cost of oil production, which is the cost of pumping the last and most expensive barrel required to satisfy demand is increasingly higher due to the technical challenges associated to drilling in places like the Arctic Ocean or deep waters, which involve higher material costs and falling productivity.
Gulf countries need high oil prices because they have to meet rising fiscal needs. But, in the event of a sustained period of low oil prices, a large chunk of today's global production would have to shut down due to high extraction costs.
Instead, the Gulf would be the only place in the world where producers would still make money by selling oil at 40 a barrel. Saudi Arabia and its neighboring countries still have an important role to play in global energy markets in the decades to come.
The writer is the senior economist at Asiya Investments, an Asia-focused investment company. Views expressed here are of his own and do not reflect newspaper's policy