Jeff Merkley says oil production costs are flat year over year

For all of you who’ve watched the spinning numbers at the gas pump, PolitiFact Oregon offers a new challenge -- calculating the cost of finding oil and bringing it to the surface.

Oregon Sen. Jeff Merkley believes he’s cracked the code. He claimed as much in a May 16, 2011, speech on the Senate floor in which he urged his colleagues to pass legislation that would strip $2 billion in annual tax subsidies from the five biggest oil companies. (The bill failed.)

"So the companies are able to sell oil that costs no more to produce today than it did one month ago, no more to produce today than it did three months ago, when oil was much lower, no more expensive to produce today than one year ago, when it was $3 a gallon," he said, noting that the price of oil as he spoke  was $100 a barrel.

With the economics of oil in constant flux, we will focus on the last part of Merkley’s assertion, that oil is "no more expensive to produce today than one year ago."

The ultimate price is derived from a complicated -- and dense -- synthesis of fixed costs, the financial markets, geopolitical developments (Libya, for example) and global economics. That includes actual fixed costs such as transporting and refining oil in addition to a highly fluctuating value added by commodity traders.

That’s why members of Congress, including Merkley, have been asking so many questions of late about the role of market speculators who by some estimates can add $20 or more to the cost of a barrel of oil.

To back up his claim, Merkley cites a report by Democrats on the Finance Committee that finds production costs roughly the same from year to to year. That number, however, includes oil from old and very large fields that is much cheaper than oil from new and smaller deposits.

He also points to testimony by ExxonMobil CEO Rex Tillerson to the Senate Finance Committee on May 12, 2011.

Tillerson, who was actually responding to a question about the impact of speculators, seemed to corroborate Merkley’s suggestion that the production cost has been stable.

Noting that it’s hard to judge, Tillerson estimated the cost at $60 to $70 a barrel. That includes all production costs, but not the additional costs added by the financial markets.

John Felmy, the chief economist for the oil industry’s trade group, the American Petroleum Institute, argues that Merkley is "flat out wrong."  The costs fluctuate, he says, based on location, competition for crews and equipment and a host of other factors.

There’s also this: The true cost of finding oil and bringing it to the surface, which is known as the "lifting cost," is directly tied to the size of the deposit. The bigger the reserve, the lower the cost. That’s a problem these days,Felmy says, because oil "is getting progressively harder to find," which means the deposit is usually smaller and the overall cost higher.

Tillerson also raised the point that the costs of finding oil and bringing it to the surface increase as supplies dwindle. But he  said that the industry has become more efficient and used improvements in technology to keep costs lower, making total production costs roughly the same.

It’s also worth noting that the "finding costs" are only a fraction of the total cost of a barrel of oil.

The Energy Information Administration, a federal department that independently collects and synthesizes data about energy production and costs, also shows production costs roughly the same from 2006 to 2009. Those are the most recent years for which data has been collected and published.

While the total price of oil is known each day, EIA economist Neal Davis said, data on the production of oil lags more than a year behind. For that reason, he said, it’s impossible to conclusively say whether Merkley’s assertion is correct or not. He also said that costs vary from year to year so it is difficult to draw conclusions on future costs based on a previous year.

Because no absolute answer can be given until new data is available, we think Merkley’s statement needs clarification. But his fundamental point -- that total production costs haven’t changed much in recent years -- is largely correct. Even Exxon CEO Tillerson says total production costs are relatively stable. We rate Merkley’s claim: Mostly True.

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stated on March 3, 2011 in a House committee hearing

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