Gleam is gone as gold prices sink to 4-year low

[happyslug]

56. $25 a barrel was true prior to 2002, but NOT today

The reason for this is the concept of the cost to produce what is needed to fill demand sets price, no matter what is the cost of produce most of the item in demand.

Today, what is needed to fulfil demand is the oil from Fracking. The cost to produce oil from Saudi Arabia is about $2 a barrel, but Saudi Arabia lost control of the price of oil when it could NOT increase oil production enough to offset the drop in production from the North Sea Oil Fields of Britain (The UK today is a net importer of oil, through the North Sea is producing Natural Gas), the North Slope of Alaska, Indonesia, and Mexico.

With the huge drop in production from those areas (and the continued drop in production from conventional US oil fields) and no one able to increase production except for the offshore Mexico Gulf fields (Which was the main replacement for oil from 2002 till about 2006). When oil hit $80 a barrel you finally hit the price where Fracking of Texas oil fields became profitable. Thus the natural price today is $80 a barrel not $25 a barrel and once the fracking fields "Peak out" around 2017 who knows what the price will be.

Please note, given the nature of Fracking financing the price is expected to drop till 2017. I wrote about this elsewhere so I will not repeat it here but in simple terms below $80 a barrel the fracking fields can NOT break even,BUT do to how they are finance, it would cost more NOT to pump then to pump. i.e. They lose the equivalent of $20 a barrel if they produce no oil, but only $5 a barrel if they do pump. Thus the oil is being pumped but at a lost. Thus to minimize lost, the oil must be pumped which put more downward pressure over the next two years. Thus the price will go down, how far no one knows, but it will only last a few years.