Supply curve - cost of production

The cost of extraction can be quite different for different types of unconventional oil. This 

implies that where oil prices go depends crucially on the price of the marginal barrel of oil. 

This gives rise to a “break-even” cost curve, which maps out the price of oil at which a new 

oil extraction project would become economical for different types of oil, assuming oil prices 

and costs remained constant going forward. 

Figure 4 provides an example of a “break-even” 

cost curve based on information as of December, 2015. Since then, improvements in 

extraction technology have resulted in downward shifts in certain segments of this cost curve 

(e.g., shale oil).

There are three types of unconventional oil supply: shale oil; ultra-deep water oil; and oil 

sands. Of these, shale oil has the greatest potential to provide a significant increase in supply over the next decade owing to rapidly declining costs of extraction and potential for 

discovering new fields. The other sources of unconventional oil require long investment lead 

times and enormous investment in extraction infrastructure to ramp up production.