MITCEEPR: Tight Oil Development Economics: Benchmarks, Breakeven Points, and Inelasticities
When comparing oil and gas projects - their relative attractiveness, robustness, and contribution to markets - various dollar per barrel benchmarks are quoted in the literature and in public debates. Among these benchmarks are a variety of breakeven points (also called breakeven costs or breakeven prices), which are widely used, and widely misunderstood. Misunderstandings have three origins: (1) There is no broadly accepted agreement on definitions; (2) for any given resource there is no universally applicable benchmark; (3) various breakeven points and other benchmarks are applicable at various times in the development of a resource. In this paper we clarify the purposes of several benchmarks and propose standardized definitions of them. We show how and why breakeven points are partitioned, and when each of the partitioned elements is appropriate to consider. We discuss in general terms the geological, geographical, product quality, and exchange rate factors that affect breakeven points. We show how breakeven points change over time due to endogenous and exogenous factors. We describe some other factors that contribute to tight oil market dynamics. Finally, we explore macroeconomic and policy implications of a broader, more rigorous, and more consistent application of the breakeven point concept, and the understanding of the inelasticities that accompany it.