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US Energy Boom Deals Blow to OPEC

The members of OPEC meet in Vienna this week with nothing major to discuss. Despite economic uncertainty and political turmoil in the Middle East, oil prices remain over $100 per barrel, and production has not wavered far from the quota of 30 million barrels per day in quite some time.

But OPEC workers had to hustle to maintain the calm. In particular Saudi Arabia, which has the most flexibility in production, has revved it up to a 30-year high this year. If not for this increase, sanctions against Iran might have administered a severe shock to oil supply. In the past, Saudi Arabia has been happy to play the role of swing producer, but the FT reports that those days may be quickly coming to an end. Saudi Arabia is thinking of stepping back in 2013, when OPEC will likely face additional issues:

The Saudis’ zeal is now moderating. Figures published by Opec on Tuesday showed that the kingdom cut its crude production to its lowest level this year, pumping 9.5m b/d in November, significantly less than its June high and 230,000 b/d less than in October.

Analysts warn that monthly production figures can show seasonal fluctuations. But the numbers do appear to indicate that Riyadh is running its own production policy, with little reference to Opec.

Prices have stayed strong for much of this year, but Saudi is now adjusting production to slowing global demand growth and a big jump in domestic US crude output thanks to the shale boom. In 2013, the risks might be harder to manage.

It’s the last point here that’s most important. Saudi’s are cutting back their production for a number of reasons, but high among them are the oil and gas reserves in North America, many of which are only now beginning to come online.

This is the beginning of a trend. The American energy boom is already changing Saudi thinking regarding its own oil reserves, and OPEC’s influence is in an even more advanced stage of decline. Divisions within the cartel and the threat of competition from “vast” North American reserves pose a serious threat to a tight-knit organization that isn’t used to external competition. And as its influence wanes, the remaining members will begin to compete for portions of a continually shrinking pie, weakening the organization’s cohesion and further reducing its influence.

It will take time for the full effects of the shale boom to fully manifest themselves, but even at this very early stage OPEC can feel its power slipping away. The rest of the world will do its best to contain its sorrow.

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