Saudi Arabia cut the price at which it sells crude to U.S. refineries earlier this week, in a move that many saw as an attempt to put the brakes on the American shale boom and gain market share. The NYT reports:
The effort was interpreted by many traders as a sign that Saudi Arabia will try to compete with American oil to protect its shrinking but still considerable market share in the United States…Production in the United States increased by 70 percent over the last six years, reducing OPEC imports by roughly a half.
We’re seeing a high stakes game of chicken, with the Saudis and OPEC betting on the likelihood that American shale producers will feel the pinch of sustained low crude prices before the cartel’s petro-states do. The breakeven prices vary between American shale formations significantly, just as they do between the various members of OPEC. OPEC needs a high price for members to balance their budgets, while the shale revolution needs a high price to continue drilling profitably. By neglecting to cut production as they’ve done in the past, OPEC is consigning itself to lower prices and unbalanced budgets in the short-term, while expecting U.S. shale producers to reduce output and eventually stabilize the market.There’s one potentially fatal flaw in that plan, however: American innovation. U.S. drillers continue to improve on the techniques that let them unlock shale in the first place, and the breakeven prices for various formations are dropping accordingly. If the U.S. continues fracking as usual, the world could have a massive oversupply of crude next year, as the FT reports:
Opec expects the US shale industry to swerve first, cutting its production. If he is wrong, and Opec too refuses to cut its production, the world could be heavily oversupplied with oil next year, especially if global growth remains sluggish. Prices would slump even further.
Cheaper oil prices are generally good for economies, unless those economies rely on the profits they make from oil and gas sales. With American shale production getting ever more efficient, it’s looking like OPEC and the rest of the world’s petrostates (looking at you, Russia) have a lot more to lose if prices keep plunging.