Monday, November 3, 2014

PPT on Firm Cost Curves as it relates to the price of oil.

I love it when the media post(s) helpful resources.

The graphic below comes from a Wall Street Journal article:   Energy Boom Can Withstand Steeper Oil-Price Drop
Source: Wall Street Journal
It gives a range of "Break-Even" price points for barrels of oil from different shale formations throughout the US and compares it to the current price of a barrel of oil, $82.20 (Wednesday, Oct 29).

In AP Microeconomics, "Break-Even" is defined when the price the firm receives for a good equals the Average Total Cost (ATC) or producing that good.  ATC is the sum of the firms "Explicit" money costs (dollars paid out in expenses) and its "Implicit" Opportunity Costs.

The article has a couple of relevant quotes that help in the analysis I put together in the form of a PPT to helps students understand this concept.

"U.S. crude closed Wednesday at $82.20 a barrel, and far less in some parts of the country where few pipelines are available to move it to refineries. Lower oil prices mean drillers will have less cash to cover their borrowings, especially if crude prices tumble more."
"Borrowings would be considered "Fixed Costs" as they have to be paid back regardless of production.
 "To be sure, even small price drops could begin to affect production around the margins. “The clear losers in a low-price environment are going to be smaller companies that are overleveraged,” said Daniel Katzenberg, a Baird analyst. The downturn will be particularly toughon companies drilling in areas without much history of oil production. Costs tend to be high in these areas, which include the Tuscaloosa Marine Shale in Louisiana and Mississippi and some relatively unexplored shale formations in Oklahoma.
The current price environment is a bit like a stress test to determine which companies have their financial and operating houses in order. Those that spent too much to lease property to drill, or have high operating costs, are most likely to suffer."
 Keep these things in mind as you view the PPT.  Visual the price of oil you see in the graphic moving to the left (decreasing) and encroaching on the Break-Even points.  Hopefully it will help!  Let me know of anything I might have missed.  Thanks!

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