In 2015 the U.S. Will Elbow OPEC to the Sidelines

In 2015 the U.S. Will Elbow OPEC to the Sidelines

by | published December 23rd, 2014

My recent meetings in Dubai highlighted the profound change that will turn the balance of power in the energy industry on its head.

For years, OPEC was the puppet master, and the U.S. (and the rest of the world) were the puppets. They pulled the strings, and we danced. OPEC set the price of oil. OPEC controlled the supply.

But those days are ending. After dictating the course of oil prices for more than 50 years, OPEC is finding its influence diminished.

OPEC’s oil ministers can read the handwriting on the wall as well as anyone. Not only are they about to lose the largest energy market in the world, but they’ll soon be competing for the markets that used to be theirs for the taking.

Because in 2015 the U.S. will start pulling the strings…

Regardless of Oil Prices, the U.S. will Dominate

U.S. unconventional oil production is poised to set the bar for the next generation.

Only a few years ago, the American economy was dependent upon imports to meet almost 70% of its daily oil requirements. Within the next five to ten years (perhaps even sooner), that figure will drop to about 30%. Most of that will come from Canada.

Coupled with huge reserves of natural gas, energy independence for both the U.S. and North America has arrived.

The difference, of course, is the shale revolution. Actually, this includes both tight and shale oil and gas. Both are hydrocarbons trapped inside rock formations, requiring fracking and horizontal drilling. “Tight” is a broader category including shale and other rock, especially sandstone lenses.

Definitions aside, this is a bigger “game changer” than anything that has come down the pike in the last two generations. It has fundamentally altered the landscape, and turned the U.S. into a net surplus producer.

The current low price of oil won’t change that.

Unconventional Oil Production is Still Profitable

Technical advances have both improved the production and lowered the overall cost of oil drilling. Better drilling techniques and geological mapping have provided additional basins and deeper horizons. Environmental problems have been addressed in some dramatic improvements, lowering or eliminating the need to put dangerous chemicals downhole.

That isn’t to say that fracking should occur everywhere.

There are still places were fracking should not occur – watersheds, seismically sensitive and active areas, and locations abutting population concentrations. Nonetheless, the projected volume of extractable reserves continues to increase, subject to one primary caveat.

The price of production.

Now, I just said that U.S. unconventional oil production can be profitable even at the current low prices.

This is different.

What oil pricing really affects is how oil reserves – that is, how much oil can be extracted – are calculated.

You see, most industry sources base their calculations on technical factors when they estimate how much oil and natural gas can be brought to the surface.

I prefer to expand that a bit and only consider extractable what can both be gained technically and can be sold at a profit.

As a result, my estimates of what is extractable tend to be more conservative than others. Still, even at today’s prices, there are significant reserves available, and they outstrip any projected domestic demand.

The impact of such unconventional resources is clear when one is considering the American picture. That in itself would alter the international trade in oil and even natural gas (with the advent in 2015 of large U.S. exports of liquefied natural gas, or LNG). But the effect is even larger, and with it comes the hastening of OPEC’s decline.

Global Oil Producers are Following the U.S. Lead

Each comprehensive study released of tight/shale oil and gas indicates the vast bulk of available reserves are located outside North America – more than 86% of the oil and 88% of the gas. The energy revolution is truly one that will be worldwide.

Those reserves can be extracted using current technology. In fact, the U.S. and Canada have been providing a “proof of concept” to the rest of the world for almost 10 years now.

It won’t happen overnight. It will take other global areas longer to rev up production, there will be statutory and regulatory delays, additional needed (and costly) infrastructure, and the development of major new delivery networks.

But it is coming and will provide a major export market for U.S. technology and expertise.

This is one of the major concerns facing OPEC. Not only is North America off the map as a target for exports, progressively other parts of the world will be tapping new reserves and meeting more of their domestic demand locally.

Right now, OPEC represents about 40% of global daily production. The organization still has a say in what the energy market looks like.

But for OPEC, oil can no longer be used as either a weapon or as a lever.

There is simply too much production arising beyond the control of the cartel.

Russia, Mexico, and Canada have always been outside the OPEC orbit. And while Moscow has on occasion paralleled OPEC moves, one of the three most dominant oil producers has broken over the Saudi-inspired move to keep prices low. Russia is now fighting to save the ruble as its central budget disintegrates. The current price of oil is driving the Russian economy headlong into recession.

Meanwhile, the U.S. has emerged as a major global energy player. We’re now in a two-horse race with Saudi Arabia for the lead in oil production.

At present, the rise in American unconventional production effects OPEC only in the expected decline of exports it can expect to move to the U.S. That’s because exports of crude oil from the states is prohibited by statute.

But it’s only a matter of time before American producers will be allowed to export excess production. And there is ample room for that without adversely impacting either domestic availability or price.

Not only is OPEC losing the largest market in the world – the U.S. – but the organization will soon have to compete with the U.S. and Canada for the lucrative European and Asian markets.

The cartel may play the game a bit longer of selectively cutting prices to one region or another, but this will only buy a few years. The end of hegemony is coming.

When OPEC decides to hold a wake, we will probably send flowers.

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  1. Richard Malmed
    December 23rd, 2014 at 14:24 | #1

    I request that you comment in future columns on the current state of solar energy cost to produce and how soon it might reach commercial viability v. oil with or without government tax subsidies. Secondly, it is very important to Poland and the Ukraine that they have source of energy. Is shale oil in eastern
    Europe or especially Poland and Ukraine available in any quantity in the near future,say five years?

  2. Woody
    December 23rd, 2014 at 18:41 | #2

    Dear Kent,

    Why not tariff up oil to say $80 that is imported from other than North America? This would allow the companies to remain profitable and not eviscerate our infrastructure and further put a spike in the shenanigans in the world oil market place. Our economy would thrive with $80 oil compared to $100 oil and we would have pricing security into the future by continuing to support our North American production.

    Just a thought.

  3. Chris Virtue
    December 23rd, 2014 at 19:13 | #3

    I am a native of Jamaica. I have seen the horrible effects that millions of poor folks have suffered due to OPEC. High energy prices hurt Furst World oil importers but devastate the poor in Third World Iol importing Countries.
    It is pay back time for the greedy OPEC Sheiks. Now at last many working poor can have a better life, thanks to good old American oil technology.

  4. December 23rd, 2014 at 22:18 | #4

    What happens when prices fall enough that fracking is no longer profitable? Marin Katusa is saying that low oil prices will drive marginal producers and exploration companies out of business. See: fintrend[dot]com/2014/12/23/oil-slump-will-hurt-us/

  5. Steve Rison
    December 24th, 2014 at 11:51 | #5

    You said “There are still places were fracking should not occur – watersheds, seismically sensitive and active areas, and locations abutting population concentrations.” Why should locations near population concentrations be avoided for fracking activity? If fracking is so safe, then what is the risk in fracking there? If there IS a risk involved with fracking, why should all the risk of harm be borne by rural residents, while urban and city dwellers get all the benefits of energy supply without any risk? This is just one more example of treating rural residents like second-class citizens of a third-world country, something American industry and governments are very good at. ‘Oh, let’s haul our city garbage and sewage sludge to the countryside, and let’s not locate our power plants too close to the city so that we don’t pollute the city air, and let’s not frack the ground under our cities – just in case…’

  6. Robert in Vancouver
    December 24th, 2014 at 17:32 | #6

    OPEC countries have been providing funding to radical enviro groups in an effort to block the production and transport of oil from Canada’s oil sands and US shale oil.

    Of course the enviro groups say it’s all about saving the planet. But if that’s the case, why don’t they ever go after OPEC countries who have almost no environmental regulations and cause enormous damage to the environment.

    For example, Venezuela has oil sands similar to Canada but Venezuela produces 5 to 7 times more waste. Canada collects and treats it’s waste and renders it harmless. Venezuela simply dumps it’s waste into the Amazon jungle.

    But you’ll never see enviro groups going after Venezuela because that’s where a lot of their donations come from.

  7. schippe1
    December 26th, 2014 at 04:35 | #7

    But what will the price of oil be in the next 12 to 24 months? And most small E&P company’s need a price of over 80.00 dollars just to pay off there debt.

  8. December 28th, 2014 at 10:00 | #8

    What does this environment do to the near term and long term potential of LINC Energy?

  9. Dell Garmer
    December 28th, 2014 at 14:36 | #9

    I hope the USA can hold on against OPEC. I would pay more for gas to support US oil companies. Buy American Energy.

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