A third-hand report about Canadian Natural Resources stating that capital costs to hire critical contractors (e.g. for drilling and such) are increasing and leading to significant project budget overruns.
This is the nature of commodity markets – when prices are high, all companies rush in to expand projects and try to increase capacity so they can sell more product. When they are finished, they dump into the marketplace, depressing prices. Because of the fixed capital investment, it makes better economic sense to keep pumping product out even when the price of the underlying commodity does not make economic sense if you were beginning the project from scratch. As an example, if you include all fixed costs and it comes to $60/barrel, if you expect oil to be above $60 then it makes sense to build the project. If marginal costs of extraction are $40/barrel after that point, then it makes sense to keep operating even if you are below the break-even point for the entire project.
This is how you get commodity busts – even below the cost of marginal extraction. It happens when all of the producers have put in their fixed-cost investments, and it is more profitable for them to mine the product than to idle their machines.
Figuring out when this happens on a global scale is very, very, very difficult to perform. It requires a lot of industry-specific knowledge and a lot of data mining, and a lot of gut instinct. There is also the demand-side of the formula – if you expect consumption to increase faster than the supply expansion then you can still anticipate price increases. However, the big downside risk to the crude oil mining industry is not the increasing cost of providing supply, but rather determining if sufficient demand exists to warrant high future prices. Executives of oil companies are more or less trying to predict whether oil prices will continue to remain high two or three years out, when capital project decisions today are made.
Companies like the newly public Athabasca Oil Sands will not begin production until around the 2014 time-frame; they are incredibly leveraged to oil prices.
The futures markets do give a small hint of what is to come – January 2015 oil futures are at $86/barrel, compared to $72/barrel for July 2010 prices.