OPEC’s Trillion Dollar Mistake
A few days after Christmas I appeared on CNBC Asia’s Squawk Box to discuss the volatility in the oil market. Bernie Lo asked a question about OPEC’s strategy, and I characterized their decision to defend market share as “a big, costly mistake” that had already cost the group over $500 billion in 2015 and would likely cost them that much again in 2016.
I followed that appearance up with an article for Forbes called OPEC’s Trillion-Dollar Miscalculation (which went viral and received more than 100 times the traffic of their typical energy article). In that article I detailed the numbers behind my assertion.
Two weeks later, Continental Resources CEO and shale drilling pioneer Harold Hamm went on CNBC and reiterated my argument. He called OPEC’s strategy “a monumental mistake for them, I might add, a trillion-dollar mistake.” While there were a number of responses to Hamm’s comments that displayed varying degrees of schadenfreude over the huge decline in his net worth, I didn’t see much acknowledgement that the point is correct. So let’s review.
Related: Saudi Aramco Chairman Talks Oil Down
By the time of the 1973 OPEC oil embargo, OPEC’s share of global oil production had been rising for years. In 1973 OPEC was producing more than 50 percent of the world’s oil. But in response to the embargo, countries all over the world implemented a number of changes to gain back some degree of energy security (addressing both supply and demand side), and OPEC’s market share went on a decade-long decline. By 1985, OPEC’s share of global oil production had fallen to 27.6 percent, but by 1995 it had once again risen to above 40 percent. In 2008, just as the shale oil boom in the U.S. was beginning, OPEC’s share reached 43.8 percent.
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