Resource Insights: Turnabout: OPEC shows U.S. oil producers who’s boss.
To paraphrase Mark Twain: Rumors of OPEC’s demise have been greatly exaggerated.
Breathless coverage of the rise in U.S. oil production in the last few years has led some to declare that OPEC’s power in the oil market is now becoming irrelevant as America supposedly moves toward energy independence. This coverage, however, has obscured the fact that almost all of that rise in production has come in the form of high-cost tight oil found in deep shale deposits.
The rather silly assumption was that oil prices would continue to hover above $100 per barrel indefinitely, making the exploitation of that tight oil profitable indefinitely. Anyone who understood the economics of this type of production and the dynamics of the oil market knew better. And now, the overhyped narrative of American oil self-sufficiency is about to take a big hit.
After weeks of speculation about the true motives behind OPEC’s decision to maintain production in the face of declining world demand–which has led to a major slump in oil prices–the oil cartel explicitly stated at its most recent meeting that it is trying to destroy U.S. tight oil production by making it unprofitable.
One of the things a cartel can do–if it controls enough market share–is destroy competition through a price war. Somehow the public and policymakers got fixated on OPEC’s ability to restrict production in order to raise prices and forgot about its ability to flood the world market with oil and not just stabilize prices, but cause them to crash.
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