Thanks for the emails.

The cost values are the composite monthly refiner aquisition costs.

These are found at: http://tonto.eia.doe.gov/dnav/pet/pet_pri_rac2_dcu_nus_m.htm

They are actual costs (not real, chained to a particular date or year). It really does not matter which cost data one uses from the various options the EIA uses...you get the same type of curve.

I could have just as easily run the data with the WTI spot market price average (one of the daily values I track) for each month compensated for delay and autocorrelation and I still would end up with the same general curve.

It is worth noting (since you can't see it explicitly in the data) that the "curve" is really an average of a curve path that shows hysteresis. That is more evident at lower production rates.

It is a correct concept. What it suggests is that the differential cost (or incremental cost) of that next barrel of oil becomes not only larger but possibly infinitely large when a limit is reached.

If the supply, or more accurately the rate of supply, were infinite then this uptick would be an anomaly.

There are several ways to look at it:

1) It's a (short-term) capacity issue...that if we really had the capacity to just add another 5, 10 or even 25 million BPD, the curve would not curve and instead we'd have a zer-slope or slight negative sloped line with scatter to it. What we really ran into, besides a financial bubble, was a place where all the spare capacity was "used up" and to the extent that fields and refinery were available, they were running "flat out." Given a couple of more years the real sustainable capacity will be significantly increased so that we do not run up against these limits in the future.

2) It's a short-term capacity issue created artificially. In other words, people would like to produce more and have the capacity to turn the valves much further open than they were/are. They refused to open the valves to drive the price to higher levels rather than flooding the market and causing the price to go down (dramatically) or increasing the flow so that the marginal/increment cost remained the same once a price point was reached.

3) This is the peak (geological) characteristic: as production flattens or declines, prices go up (and eventually and incrementally destroy demand). Too rapid a rise causes a widespread collapse and it may not allow a restart of the economy on the way back down (like an aircraft with insufficient thrust to overcome gravity, the climb will stall and then begin a fall. If you have enough time and distance, you might gain enough lift to regain controlled flight. If not, you "crater.").