Nearly everyone believes that oil prices will trend higher and higher, allowing increasing amounts of oil to be extracted. This belief is based on the observation that the cost of extraction is trending higher and higher. If we are to continue to have oil, we will need to pay the ever-higher cost of extraction. Either that, or we will have to pay the high cost of some type of substitute, if one can be found. Perhaps such a substitute will be a bit less expensive than oil, but costs are still likely to be high, since substitutes to date are higher-priced than oil.

Even though this is conventional reasoning based on experience with many substances, it doesn’t work with oil. Part of the reasoning is right, though. It is indeed true that the cost of extracting oil is trending upward. We extracted the easy to extract oil, and thus “cheap” to extract oil, first and have been forced to move on to extracting oil that is much more expensive to extract. For example, extracting oil using fracking is expensive. So is extracting Brazil’s off-shore oil from under the salt layer.

There are also rising indirect costs of production. Middle Eastern oil exporting nations need high tax revenue in order to keep their populations pacified with programs that provide desalinated water, food, housing and other benefits. This can only be done though high taxes on oil exports. The need for these high taxes acts to increase the sales prices required by these countries–often over $100 barrel (Arab Petroleum Investment House 2013).

via What’s Ahead? Lower Oil Prices, Despite Higher Extraction Costs | Our Finite World.