OPEC met, mingled, and in the end did nothing of consequence in Vienna this week. The cartel’s members convened for a highly anticipated summit to discuss what, if anything, should be done about the plunging price of crude oil, the commodity on which each petrostate member relies on to stay solvent. But the most important delegation in these discussions, the Saudis, blocked any potential production cut, essentially ensuring that the bear market was here to stay.As a result, crude prices took another tumble, down below $72 per barrel at last check, a far cry from the $114 per barrel it was fetching back in June; one Rosneft official is now predicting prices will fall below $60 per barrel next year.OPEC is playing a game of chicken with American shale producers, betting on the fact that the price of oil will squeeze out U.S. competition which has contributed to a global oversupply as fracking has unlocked large new reserves of crude. Those shale formations are expensive to work with, and as such require a relatively high price of oil to profitably produce. OPEC expects these newcomers to be the ones to constrict production and stop the price slide. The FT reports:
“Opec is not alone in producing oil,” said Suhail bin Mohammed al-Mazroui, energy minister of the UAE. “There is oversupply, but this is not an Opec problem.” The US should recognise its role in pushing the price of oil to four-year lows Mr Mazroui said. The US shale oil industry “started as a humble producer” and is now a “major contributor to world supply”, he said. “The newcomers . . . need to work with the fundamentals.” […]The clearest reference to this strategy came from Ali al-Naimi, the oil minister of Saudi Arabia, before the meeting, when he said he expected the oil market “to stabilise itself eventually”. Ali Saleh al-Omair, Kuwait’s oil minister, meanwhile, said it would “live” with the market price of oil whether “it is $60, $80 or $100 a barrel”.
There are two wrinkles in that strategy, however, and either could scupper OPEC’s attempt to slow down the shale revolution. First, consider the following chart:
Petrostates have grown accustomed to high oil prices, and many of OPEC’s members (and Russia, as well) require very high prices of oil to balance their budgets. These levels, known as breakeven prices, vary state to state, but the current price of crude is already a threat to a number of petrostates. So far the Saudis seem willing to operate in the red in an attempt to gain market share, but these price pressures could open up fissures in the cartel. Venezuela has already stated that it will continue to push for production cuts until oil once again trades above $100 per barrel.But there’s another force working against OPEC: American innovation. The scope of the U.S. shale revolution has been outshined only by the pace at which it has arrived, and the industry is relentlessly seeking ways to extract more oil, more efficiently. Current prices are a threat to operations in some of the more expensive American shale formations, but the bulk of the industry can still turn a profit, and it’s hard at work improving its methods.