OPEC’s Shale Problem

Many articles have been written this past year about the impending demise of OPEC. Shale oil, it has been argued, has ended the cartel’s stranglehold on oil prices.

There’s some truth to that argument, but it also understates OPEC’s dominant position in the oil market.

I often try to imagine the decisions I would make, given OPEC’s situation and the unexpected emergence of U.S. shale oil production. For decades, OPEC has had the luxury of looking at the global supply and demand outlook and raising or cutting production as they saw fit.

Shale Oil Emerges

But then the U.S. unexpectedly became the world’s fastest-growing supplier of new oil production.

Oil Supply Growth 2008-2017

Of the 10.3 million BPD of new oil production since 2008, the U.S. supplied 6.2 million BPD (60%). The world’s two other major oil-producing countries, Saudi Arabia and Russia, saw their production increase by 1.7 million BPD and 1.2 million BPD respectively since 2008.

This surge of new oil production from the U.S. put OPEC under a lot of pressure to either cut production to balance the market, or to defend market share. I thought it was in their best interest to cut production, but instead, in 2014 they made the decision to defend market share. I deemed that OPEC’s Trillion Dollar Miscalculation.

Prices Collapse

Five weeks after that Thanksgiving 2014 announcement, oil prices had dropped into the $40s (after already sliding from ~$100/bbl to the upper $70s over the prior four months). Indeed, OPEC realized its dilemma, and in 2016 the cartel made an agreement with several non-OPEC countries (most importantly, Russia) to cut oil production by 1.8 million BPD.

That was a significant cut, and oil prices ultimately recovered back to the $70-$80/bbl range. But as I noted in an article last year, U.S. production growth could potentially offset those production cuts in a little over a year.

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