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The Marginal Cost Of Oil Production

|Includes: The United States Oil ETF, LP (USO)

There is a theorem about the marginal production cost of oil. The price of the commodity in question should always be slightly higher than the marginal production cost of oil. If not, then many companies that produce the commodity will start going bankrupt.

Wikipedia has this definition for marginal cost of production:

The change in total cost that comes from making or producing one additional item. The purpose of analyzing marginal cost is to determine at what point an organization can achieve economies of scale. The calculation is most often used among manufacturers as a means of isolating an optimum production level.

In the case of oil, it would take over $100 now to produce an additional barrel of crude oil. The oil production cost was only $85/barrel in 2009. So, if we see a crude oil price of $85/barrel today at a marginal cost of production around $100/barrel, a light should spark in every investor's mind. Especially when we hear news that Iran is threatening to stop exporting crude oil.

I'm going to bet on this by buying stocks like United States Oil Fund (NYSEARCA:USO) and leveraged oil ETF's like (NYSEARCA:UCO).