Gasoline, oil sands and marginal cost

The price of gasoline at our local gas station has gone down by 11 cents a liter in the last couple of days.  This coincides with this article about concerns for the future of the Alberta oil sands project.

Oil from the Alberta tar sands is expensive to extract and illustrates the workings of marginal cost.  As everyone knows price is equal to marginal cost, the cost of producing the last unit.

As demand for oil has increased the price has gone up making it economic to go after more difficult deposits such as the tar sands.  This may keep up production but I fear that rather than allowing economic growth to continue it just slows down the rate of negative growth.  Economic growth would be more likely if marginal cost were falling with increasing production.

It also means a reallocation of financial resources to maintain our energy use which must be causing problems throughout the rest of the economy.  The more we spend on oil the less we have for other products.

We should not assume that the cost of exploiting the oil sands is consistent through the whole deposit.  It could be the marginal cost will keep increasing as the easiest of the deposits is depleted.

A further problem for oil sands producers is that if the price of oil falls as a result of an economic slowdown, then they may not get enough to cover their costs and will have to stop production.

Probably most of us Canadians benefit from the oil sands but we shouldn’t be too complacent.

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

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