When Oil Was Free

| About: The United (USO)

Were you alive when oil was free? Were you born yet? Did you have TV? Let me help: Oil was free about two months ago in January, when it traded around 34.00 per barrel.

Each barrel of oil contains about 5.8 million BTUs. Each American uses about 25 barrels of oil every year. Considering that it takes an adult one hour of work to generate about 300-500 of their own BTUs, our lives are clearly transformed each day by a “helper” known as oil. That oil is dirt cheap even at 100.00 dollars a barrel is pretty obvious.


But when oil was trading at 35.00 earlier this Winter, the price barely reflected the global average costs of extraction and transport. This average cost level often appears to some as a complex issue, because oil comes out of the ground so cheaply in the Middle East, and more expensively elsewhere. But it’s frankly not that complicated. The journey to 35.00 dollar oil was part of a supply crash that caused voluntary cuts in OPEC, and involuntary cuts in non-OPEC production. When the world offers 35.00 dollars for a barrel of oil, that is simply not enough value-in-exchange to keep global oil production at a steady level. Let alone growing.

Because I regard 35.00 as the level where oil is essentially free–the level where the supply chain recoups its costs and then hands you 5.8 million BTUs of black stuff as a free stub–it’s now appropriate to mark the oil price from that starting point. Should there be a new dislocation in the purchasing power of the USDollar, this could change my 35.00 dollar level. Probably to the high side. Until then, you should generally view the spread between 35.00 and the trading price as the price of oil.