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A Double Bubble Drives Rising Oil Production Costs
By: Daniel Yergin
The dramatic run-up in oil prices in recent years has been the subject of much attention and many headlines. What has received far
less attention is another increase: the parallel rise in the costs of drilling for oil and building the infrastructure necessary to pump it
out of the ground.
This surge in costs has a significant impact on the oil industry's ability to meet growing global demand for oil and the timing of
developments. These rising prices figure directly into the price of crude oil, gasoline and other products.
Among investors and within the industry, this rise is a major preoccupation, and with good reason. For the increase is substantial.
Project costs are up 68 percent on average since 2000. That is the conclusion of our new IHS/CERA Capital Cost Index. And most of
the real increase has been in the last two years.
What's driving these cost increases? We call it the "double bubble."
Two kinds of goods and services are needed to transform an initial discovery into a producing oil field. The first are commodities like
steel and general-purpose equipment such as generators that provide electricity in remote locations. The second kind is equipment
specific to the oil industry, such as drilling rigs, along with the experienced workers who can run them. Both kinds of costs have
taken big leaps in recent years. That's what we mean by the "double bubble."
The major oil price spikes of the mid-1970s and early 1980s were accompanied by global economic slowdowns. Not this time. The
costs of raw materials and general-purpose equipment have risen sharply because of the strong global economy, led by Asia's
expansion. As a result, the oil industry is competing with many others for raw materials.
Simple goods such as large-sized truck tires are in short supply. So are long-lead-time, complex goods like ship hulls. For example,
hulls needed for oil tankers are in short supply in part because of high deman