America may be supplanting—or at least joining—Saudi Arabia as the world’s go-to swing supplier of crude. Late last month, OPEC decided not to cut production, and to allow the price of oil to continue its steady decline. In the past, the cartel has tightly controlled supply in order to keep prices high, but under direction from the Saudis, it seems OPEC is content to allow the market correct itself this time.At the heart of all of this is Saudi Arabia’s desire to challenge America’s newfound clout as a major oil supplier. The shale revolution shoulders plenty of blame for the current oversupply of crude that led to today’s bear market, and the Saudis would rather see shale producers bow to price pressures and cut production (something we’re seeing evidence of) than interrupt their own supply. But, as the Economist writes, America’s energy forecast is still looking bright:
This shake-out will be painful. But in the long run the shale industry’s future seems assured. Fracking, in which a mixture of water, sand and chemicals is injected into shale formations to release oil, is a relatively young technology, and it is still making big gains in efficiency. IHS, a research firm, reckons the cost of a typical project has fallen from $70 per barrel produced to $57 in the past year, as oilmen have learned how to drill wells faster and to extract more oil from each one. […][I]nvestments in shale oil come in conveniently small increments. The big conventional oilfields that have not yet been tapped tend to be in inaccessible spots, deep below the ocean, high in the Arctic, or both…[S]hale firms know where the shale deposits are and it is pretty easy to hire new rigs; the only question is how many wells to drill. The whole business becomes a bit more like manufacturing drinks: whenever the world is thirsty, you crank up the bottling plant.
Moreover, global markets are looking a lot more stable these days, now that the U.S. looks poised to take on the role of marginal supplier:
[T]he economics of oil have changed. The market will still be subject to political shocks: war in the Middle East or the overdue implosion of Vladimir Putin’s kleptocracy would send the price soaring. But, absent such an event, the oil price should be less vulnerable to shocks or manipulation. Even if the 3m extra b/d that the United States now pumps out is a tiny fraction of the 90m the world consumes, America’s shale is a genuine rival to Saudi Arabia as the world’s marginal producer. That should reduce the volatility not just of the oil price but also of the world economy.
The Economist report is an incisive look at the state of play of the global crude market these days, and you’d do well to read the whole thing. It wasn’t too long ago that Malthusians had the public’s ear with their cries over peak oil, yet today we’re dealing with issues of oversupply and abundance. Those are the kinds of problems we’d like to have.