Tuesday, March 31, 2015

Hamilton on Alberta Oil sands given lower oil prices.

Over at the Econbrowser blog James Hamilton reflect on the Alberta oil sands response to declining oil prices. It appears that oil production from the Tar sands are not scaled back as quickly as other unconventional productions, such as tight gas, because the capital investment is much larger, so production will continue as long as the marginal costs are below the spot price.
Price cannot exceed long-run marginal cost in equilibrium. But at least in the case of oil sands, it could take a long, long time to reach that equilibrium.
Nevertheless, a government that had been banking on substantial revenues from taxes and royalties will be in for a downfall as well.

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