It’s been more than four months since the Organization of Petroleum Exporting Countries put global oil prices into a virtual free-fall when it decided at its semi-annual meeting in Vienna to not cut production.
That has put a tremendous amount of pressure on what’s been called the shale oil revolution in North America and in the United States in particular.
Who’s winning so far? Well, that seems like trying to read tea leaves in a barrel of crude.
“I think it’s two freight trains running at each other,” said Chris Faulkner, CEO at Dallas-based Brietling Energy.
Nine months ago, global oil prices topped $100 a barrel. Now those prices have been cut nearly in half.
After experiencing a remarkable energy boom in the space of less than five years, U.S. producers are now pulling back spending. Rig counts are down by 52 percent since last December, which means fewer jobs in the oil fields and ripples though state and national economies.
“There are certain areas that are just not economical at $50″ a barrel, Faulker told Watchdog.org.
But just because U.S. producers are suffering some pain doesn’t mean OPEC members are not.
In fact, you can make a very strong case OPEC is in worse shape than North American producers, who have surprised some analysts with their resiliency.
“Shale in the U.S. is a unique, new source of oil — not just geologically but in the way it can be produced,” Julius Walker, senior consultant at JBC Energy Consulting, based in Vienna, said in an interview at a recent oil conference in Houston.
“It can react much, much more quickly,” Walker said. “Companies are smaller and more dynamic. They can bring production online much more quickly, then can slow it down much more quickly. It just reacts in a way that’s completely different than conventional oil.”
While hydraulic fracturing techniques used by U.S. producers is more expensive than the conventional drilling OPEC countries employ, the break-even price is much higher for most OPEC members — many of which need oil to be well over $100 a barrel to pay for their government spending programs:
So why did Saudi Arabia — the dominant member of OPEC — refuse to cut production if it and other members are going to lose money in a low-price environment?
There are plenty of geopolitical reasons, but the Saudis and other Persian Gulf OPEC members like Qatar and Kuwait can afford to absorb the pain.
Saudi Arabia, for example, entered the price decline with an estimated $750 million in foreign currency assets — a nice cushion to potentially starve out U.S. producers during tough times.
But that doesn’t help OPEC countries like Nigeria and Venezuela, whose economies were already in trouble before the price drop. Now, those countries are teetering and the internal pressures within the cartel have intensified.
On Thursday, the OPEC governor of Libya called on OPEC ministers to change course and cut production.
“OPEC members, as a unit, need to re-evaluate their strategies,” Samir Kamal, head of planning at the North African country’s oil ministry, told Reuters by email.
Libya’s appeal came just weeks after the oil minister in Nigeria called on OPEC leaders to call an emergency meeting before the next scheduled conference June 5 and reverse the November decision.
But OPEC leaders haven’t budged.
Saudi Arabia announced last week it’s actually increased its oil output to a record 10.3 million barrels a day with no expectations of cutting back.
Just days earlier, Saudi Arabian oil minister Ali al-Naimi said his nation would be willing to “improve” global prices only if non-OPEC countries such as Russia and Mexico cut production as well.
To make things worse for struggling OPEC members, if a proposed nuclear deal with Iran is signed by the Obama administration and other western nations and sanctions on the regime in Tehran are quickly lifted, millions of barrels of Iranian oil will come into an already glutted market, putting even more downward pressure on prices.
Iran is a member of OPEC but is a long and often bitter rival of Saudi Arabia.
Last Thursday, the Iranian oil minister took a jab at the Saudis’ insistence that OPEC’s decision last November was the correct one.
“It seems (OPEC’s decision not to cut output) does not work well, because prices are coming down,” Bijan Zanganeh told Reuters. “We haven’t witnessed stable situations on the market.”
The situation has led some energy experts to wonder if OPEC can even survive.
“The end of OPEC” might be closer to reality now, said Ed Morse, global head of commodities research at Citigroup and a respected voice in global energy markets. The shale revolution “has created a sort of existential threat to Saudi Arabia and OPEC,”Morse said in a report released in February.
Others aren’t so bearish about OPEC’s future.
“Of course the strategy is working,” Gary Ross, executive chairman at the PIRA Energy Group, told the Financial Times. “You just have to be patient. For the Saudis there is no turning back at this stage.”
What about the future for U.S. oil producers?
“The short term is not great, we’ve lost jobs,” Faulkner said.
But in the long run, Faulkner thinks the United States will not just survive but thrive and leave OPEC and the Saudis gasping for air.
“We’re not a down and out kind of crowd,” Faulkner said in a telephone interview. “When someone kicks us, we don’t run the other way. We fight back. What we’re going to do is do things better, more efficient. We’re going to drive technology and innovation and we’re going to do more with less.”
Saudi Arabia’s oil exports in 2014 dropped 5.7 percent in 2014 compared to 2013.
“We need to tell Saudi, thank you for what you’ve done. You’ve made us a much stronger industry,” Faulkner said. “Your conventional assets are dwindling. We’re finding new, unconventional assets every day over here and we’re going to surpass you in this marathon. You’re going to be the No. 2 producer in the world and you need to get used to eating American dust. That’s what’s going to happen.”
Article Author: Rob Nikolewski