Factbox: Different ways of looking at the oil price

LONDON (BestGrowthStock) – Benchmark U.S. crude oil futures traded above $75 a barrel on Friday. They are little more than half the record high reached in July 2008, but more than double the low hit in December that year.

For the general media, the oil price referred to is usually the price of U.S. or Brent crude traded on international futures markets.

Below is an explanation of the many different prices and costs of physical crude oil.

MARGINAL COST

The marginal cost is how much producers have to pay to extract oil from the most difficult areas. Oil is very cheap to extract — a few dollars a barrel — in places like Saudi Arabia and Iraq.

At the margin, oil sands in Canada and deep offshore projects are much more expensive and are estimated to be viable when oil prices rise to between $70 and $80 a barrel.

When oil prices slumped at the end of 2008, many more expensive projects were postponed.

Somewhere between the most expensive and cheapest oil projects, all upcoming developments in the UK North Sea will make at least a 10 percent investment return if oil prices were at $55 a barrel, consultants Wood Mackenzie said.

OPERATING OR CASH COST

The cost of operating fields once they are already onstream has been estimated to average around $50 a barrel.

Extracting oil becomes more expensive over the life of a field. The price of producing the last oil from any field is usually the most expensive. Oil majors often begin production on large oilfields before selling on depleted fields for smaller companies to drain.

BENCHMARKS

U.S. light sweet crude, North Sea Brent and Dubai crude futures are all used as benchmarks to price different types of physical crude oil.

Although U.S. crude in particular is widely cited as “the” price of oil, many analysts have questioned whether it is really representative.

The U.S. Commodity Futures Trading Commission (CFTC) is investigating speculative trading on these benchmarks. Speculation is blamed for triggering volatility in crude prices and exaggerating the huge swings in oil in 2008 up to a record of almost $150 per barrel and down to a low of just above $30.

Some major figures in the oil industry surveyed by Reuters suggested around $10-$30 a barrel in the oil futures price has been caused by speculation.

Executives of the exchanges operating these benchmarks say, however, there is no evidence speculators cause volatility and have defended them as reliable measures.

PHYSICAL CRUDE

Physical barrels of crude oil are priced against benchmarks. Different types of crude demand varying premiums or discounts to the benchmark at a certain date or over a set period.

Lighter crude oil, which is easier to refine into products like gasoline, usually demands a higher premium over the benchmark, while heavier crude often trades at a discount.

Buyers then have to pay for transportation, taxes and any currency exchange costs before the total cost for purchasing the oil can be calculated.

FAIR VALUE

Fair value is a notional price taking into account only supply and demand and cutting out speculative influence.

The Organization of the Petroleum Exporting Countries (OPEC) says a price between $70-$80 is fair to both consumers and producers.

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(Reporting by Joe Brock; editing by James Jukwey)

Factbox: Different ways of looking at the oil price