Originally posted by astralis
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The sunk cost concept applies to all producers: shale, tar sands, Big Oil and national producers. it is not unique to shale as you say. What is unique to shale is its rather short lead-time of 2-3 years of output before very rapid drop in output. As oppose to the long cycle tar sands project in Canada that go producing for years on, never mind prices. Suncore for instance has a operating cost near $30 and most people don't know that as they assume that because it is operating in the tar sands so it must have high cost. Fact is, after the initial CAPEX has been sunked what remains is the very low operating cost needed to run the operation.
What make shale the swing producer is its short lead-time of 2-3 years, which gives it flexibility to adapt to the whims of the market (much like how the Saudi were doing by closing the valve). No matter how huge the tar-sands were they could never become the swing producers. For them closing the valve, is like turning a super-tanker.
Lastly, given the shaky nature of shale producers, banks (back in the day) mostly insisted the producers to hedge their production. Those hedge that were placed by the shale producers (the ones that did) has infact delayed their day of judgment and gave them a year or so time.
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