A barrel of crude oil is a “convenient measure,” says Eric Smith, associate director of Tulane University’s Energy Institute. “It’s 42 gallons because that’s what John D. Rockefeller put it in – old beer barrels, back in the 1890s.” Today, oil moves in pipelines, tanker ships, barges and railcars to get from the oil fields – whether in Saudi Arabia, Nigeria or North Dakota – to the refineries.
Transportation only constitutes a small fraction of the barrel’s cost, according to economist Rayola Dougher of the American Petroleum Institute, the industry trade group. Most of the cost of oil can be attributed to exploration, drilling and pumping.
“Finding the oil is a very involved process,” says Dougher. “Onshore it can take $19 to $20 a barrel, but it could be twice to three times as much offshore.”
In the Bakken shale oil fields in North Dakota, which are pumping out a lot of high-quality light sweet crude (a similar grade to the benchmark West Texas Intermediate), producers can still make a small profit with crude in the $55-a-barrel range, after subtracting the costs of exploration, production and transportation, Smith says.
“You’d probably go down to $30 before somebody shuts in a well. They might not drill a new one. But they wouldn’t stop producing the old one until the price got below that cost.”