CA Problem is Price
Notes:
- The basic California problem concerning heavy crude oil is price. With the reported cost
of the natural-gas-fueled steam for extracting the crude sometimes being as high as
$6.50/barrel in today’s market (PIW - 3/16/98), total variable costs of production
for some producers may be higher than the going market price for the heavy crude oil.
- If the price of heavy crude oil increases for whatever reason, it will ease the crude
producers’ dilemma considerably.
- A decrease in the differential alone may not solve the problem. For example, the
differential could fall as a result of light sweet crude oils losing value relative to the
heavy crude oils. The price of the heavy crude oils might not change much in that case,
even though the differential would narrow.
- In conclusion, California prices are behaving similarly to world oil prices, but the
very low quality of some California crudes like Kern makes them more vulnerable in this
low-price environment.