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Crude Economics
Why OPEC Fears Donald Trump

Donald Trump’s victory in the election this week could spell trouble for OPEC. The oil cartel is gearing up for its semiannual meeting in Vienna later this month where it is expected to finalize the details of a tentative agreement to cut its collective production by roughly 800,000 barrels per day. This deal, if it ever materializes (a big if) would help to reduce the oversupply that has kept crude prices down in recent months and years, or so the thinking goes.

But waiting in the wings are American shale producers, many of whom which are sitting on idled and recently unprofitable wells, eagerly awaiting a price rebound to restart production. Trump has promised to reduce the regulatory burden on these companies and open up more federal land to drilling, two moves that in theory could make the coming shale rebound even more powerful. The FT reports:

[C]ombining an Opec-manufactured price rise with a sudden burst of legislative cost-cutting in the new year, through lower taxes or regulatory expenses, could see US shale bounce back faster than the cartel first thought.

If the nimble US shale producers were to be too successful there’s little to stop the price sliding back down again, with record inventories of crude having backed-up in storage globally. Opec would have given up market share and revenues for nothing.

There are, however, limits to Trump’s ability to affect American oil and gas production. To be sure, oil lobbyists are salivating at the thought of what they expect will be a more fracking-friendly administration, but it’s worth noting that President Obama has already created a regulatory atmosphere that has allowed the shale revolution to thrive. And, as the FT explains, opening up federal land to more fracking won’t mean an immediate increase in American oil output:

[Donald Trump’s] promise to slash regulation of the energy industry and throw open federal lands to drilling would be unlikely in the short term to achieve much on its own…US energy companies are not sitting on hundreds of thousands of acres of undrilled land because of regulation but because it is currently unprofitable. Their bankers, who have done so much to keep them alive during the downturn, would balk at the prospect of funding an unfettered drilling spree in untested lands.

That said, the threat of an American shale recovery will still weigh heavily on the minds of the leaders of OPEC’s various petrostates. There is a strong possibility that if the cartel cuts production (and ceding market share) to prod prices up, U.S. companies would be the first take advantage of that rebound by quickly upping their output, and in so doing would keep the market well- or even over-supplied, effectively limiting the impact of OPEC’s cuts. That’s the worst-case scenario, and we could be just months away from it becoming a reality.

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  • Frank Natoli

    No mention of ANWR? No mention of Pacific, Atlantic and Gulf coastal drilling? Why is that? The oil IS THERE, and does not require fracking to extract. Only America leaves its own oil in the ground.

    • Observe&Report

      Deep ocean fields are a lot more expensive and time-consuming to develop than shale deposits on land.

    • Fat_Man

      You have to wonder who has been paying off US governmental officials to keep that oil in the ground. If Trump wants to do some good, he will investigate the foreign money that feeds the environmental movement.

      • Tom

        I’ll admit, there might be something to the idea. If you’re not sure about the viability of non-fossil fuel engines, you might want to keep your reserves around.
        Also, it would be a handy thing for dealing with petrostates. “Keep your stupidity within acceptable limits, or we open ANWR.”

    • CaliforniaStark

      Actually, a lot of off-shore oil is fracked; including in the Santa Barbara Channel in Southern California.

      http://www.keyt.com/news/environment/groups-file-lawsuit-challenging-offshore-fracking-ruling/152889317

      On a very clear day, Al Gore and Leonardo Di Caprio can see oil wells where fracking is taking place/planned from their beach front houses. What they won’t see are solar panels on top of these houses, or that of most their liberal, trendy neighbors. Hopefully, they will contemplate their lack of solar when they fly on their private planes as part of their efforts to save the planet.

      • http://whenfallsthecoliseum.com/author/kwatson/ megapotamus

        The North Sea oil fields are fracked in part. It seems like any field can be fracked and its productive life extended.

  • Russ Jr

    Typo: “American shale producers, many of whom which”

  • http://whenfallsthecoliseum.com/author/kwatson/ megapotamus

    I will comment without reading as The Atlantic has made a habit of writing without reflecting and answer, Drill baby drill, maybe?

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