In the green corner we have the US shale producers. In the red corner we have the oil exporting countries of OPEC. Assuming the fight is fought to a conclusion, who wins?
OPEC wins. The US shale producers will shut down first. The reasons are:
• The US shale producers are motivated by economics, and all other things being equal will have an incentive to cut production at or around the point where production cost exceeds sales price.
• The OPEC countries are motivated by social imperatives. They have historically used their oil wealth to finance social programs, build infrastructure and subsidize basic foodstuffs and other items such as gasoline (which costs one cent/liter in Venezuela). Cutting back on social spending courts civil unrest and cutting back on oil production cuts spending, so they have a disincentive to cut oil production. (As long as the oil price exceeds cash production costs, which it does in all OPEC countries by a substantial margin, they in fact have an incentive to increase production).
But not all OPEC countries are created equal. Some can stand the pain longer than others, and here we will look into the question of who might go to the wall first if low oil prices persist.
Related: Oil Price Tumbles After OPEC Releases 2015 Forecast
But first the US shale producers. The recent graphic from Business Insider reproduced in Figure 1 is not backed up by much in the way of explanation but my understanding is that it shows current production and breakeven production costs at US shale oil plays based on Citigroup estimates. If we take these results at face value we find that almost all US shale oil production is economic at crude prices of $70/bbl, but 40% of it becomes uneconomic at prices below $60/bbl and almost 90% of it at prices below $50/bbl:
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