The price of oil has plummeted in recent weeks on lower global demand and too much supply, in large part thanks to the flood of new crude supplies coming out of American shale formations. In the past, OPEC has stepped in to cut production and prevent large price drops, but not this time around. As Bloomberg reports, OPEC is betting on U.S. fracking being more vulnerable to falling prices than the cartel’s member states:
As much as 50 percent of tight oil output will be “out of the market” at current prices, while the Organization of Petroleum Exporting Countries is not in a critical situation, [OPEC’s Secretary General] Abdalla El-Badri said at the Oil & Money conference in London today.“First of all, will be the tight oil” affected by the drop in prices, El-Badri said. “If prices stay at $85, we will see a lot of investment, a lot of projects, a lot of oil going out of the market.”
Many of the cartel’s petrostates have actually cut prices, not output, in a bid to gain market share in this bear market. By OPEC’s reasoning, low oil prices will soon force American frackers to cut shale production—a relatively expensive variety of drilling, given the hydraulic fracturing and horizontal well-drilling it requires. But as the WSJ reports, this game of chicken might not turn out so well for OPEC:
[Secretary General Abdalla El Badri’s] view is at odds with most U.S. forecasters, who say output can remain steady at current prices because companies have cut their costs by finding ways to produce oil more efficiently. For example, the amount of oil coming from each new well in South Texas has nearly doubled since 2012, federal data show.Marianne Kah, chief economist of ConocoPhillips , said oil prices would need to fall to $50 a barrel “to really harm oil production” in U.S. shale basins. She said 80% of the American shale sector—in which ConocoPhillips is a major operator—is profitable at prices between $40 and $80 a barrel for benchmark West Texas Intermediate crude.
This is a question of breakeven oil prices, and the numbers indicate that OPEC’s members need a higher price of oil to balance their budgets than American frackers need to profitably drill shale formations. For now, the cartel seems willing to stay the course (though countries like Venezuela are decidedly unhappy with the current price of oil), but its members must be sweating bullets as they follow global crude markets. OPEC is meeting in late November, and the cartel’s ability to weather lower prices, especially as compared to the shale boom’s ability to do the same, will be top of that agenda.