Can someone explain to me why high crude oil makes big oil more money?

Keep in mind much of it is based off of points. 10 points on $100 yields twice as much as 10 points on $50. Also, the bigger your numbers get, the easier it is to manipulate the numbers.

 

I would imagine the cost of production is "fixed". So the higher the oil price, the more profit. I have no idea what that break-even point is, but I heard $60 about 10 years ago. Production cost probably is higher today, but it's might be more efficient so who knows. (don't work in the oil industry but has plenty of friends & relatives who do so they are my source).

 

It also depends on the means of production. Some crude is easier (and cheaper) to get out of the ground and refine than other types. The production cost for the oil produced in the Middle East is much lower and the quality is much higher, making it easier and cheaper to refine into gasoline and other products. The tar sands in Alberta are more expensive to mine and much more expensive to refine, so production costs are dramatically higher.

To answer the OP's question, when the price of oil goes up, it doesn't change the cost of extracting the oil, the cost is constant (or increasing slowly over time). Since the price is higher, but the cost stays constant, the result is more profit to the oil companies.

 

It costs oil companies money to drill for oil. These costs include exploration costs (finding it) and production costs (drilling for it and bringing it to market). When you hear about the E&P sector of the oil industry, this is what is being referred to.

Some fields are relatively cheap to find and drill, such as the current fracking fields that we have recently heard so much about, while others are spectacularly expensive, such as the deep water fields in the gulf of Mexico, with their floating platforms or undersea production technologies. What makes the latter economic is the enormous amounts of oil that these fields produce, while the fracking fields tend to be very short lived, making them more expensive in many cases in terms of "cost per barrel" produced.

While Saudi Arabia is estimated to have a "cost per barrel" produced of less than $5 per barrel, the average fracking "cost per barrel" (which varies from field to field) is estimated at around $70-80 per barrel. And aside from these fracking fields, oil is getting more difficult to find around the world and more expensive to produce, as the cheaper and easier fields have largely already been tapped.

At $100 per barrel, the Saudis make an estimated $95 per barrel profit, while the frackers make $25 per barrel profit, assuming $75 per barrel average cost. Some frackers make more, while others make less, as their "cost per barrel" varies.

At $50 per barrel, the Saudis are still looking good at $50 per barrel profit, while the average fracker is now losing $25 dollars per barrel. As a result, many of these wells are being "shut in," or effectively turned off, as they are paying more out than they get from the sale of this oil.

 

The big ones have mineral rights dating 50 years back or in countries with limited legal and banking sectors with no sense of negotiations or broader market value. Therefore, they're able to get stable or minimal costs on the original commodity and can fully capitalize when the prices rise by not having to buy everything in the open market.

 

I don't understand what you are confused about. If oil is high then the companies can drill and sell it for a profit. If oil is below 60 then a lot of the projects in America would simply lose money due to cost of production. Plus the shale oil wells don't produce oil for many years. It's not like these companies can just drill and expect that well to produce for decades. I believe it's closer to 3-5 years for shale well. Someone please correct me on that point because I am just kind of guessing there.