OPEC declares war on US shale

Crude prices are falling and it has touched $70/barrel from the high $140 during end 2008. Producers are in worry whereas consumer countries are in silent celebration; calculating how far the low will remain in the future.

Reviving prices comes in the territory of OPEC- a cartel of major oil producing countries. Historically they have done it many times. Given the falling trend of crude prices, the November 27 meeting of OPEC at Vienna was keenly watched by all countries.  Surprisingly, or rather not surprisingly, the cartel has not decided for an inevitable production cut which could have stopped the free fall of crude.

Looking through the decision, it is understandable that the OPEC’s strategy of not trying to stop the price fall itself is a weapon. Recently, the OPEC member countries output has fallen to nearly 40 percent of the total production. Russia, US and Canada are now three of the four largest producers of crude. They are not members of OPEC.  If the OPEC initiates a production cut, its benefits will be enjoyed by these big three without contributing anything to the collective effort. The largest bearer of the production cut burden will be Saudi Arabia.

Everybody in the crude market- producers and consumers now knows that the present crude fall is not a temporary one. Many structural factors like renewable energy’s march in Europe, shifting to non-carbon based energies and entry of new producers have led to demand decline for crude besides the slowing demand due to the recession hit world economy.

A major development is that the US is now a producer than just a consumer in the global energy market. Shale exploration and production are not exaggerations, rather powerful enough to create ‘crude glut’ and price fall. Increased shale production and reduced US demand for crude is a geo-political and economic event producing many global effects. The OPEC is in the process of accommodating the US as a major producer and shale as an important source.

The no decision to production cut is to discourage future investment in shale industry. It is believed that if the price falls below $80, margin will come down in Bakken, Eagle Ford etc. This will certainly discourage big investment and potential production in future.

As production increases outside OPEC, cartelization of crude market will weaken. The new conflict between OPEC and non-OPEC producers will keep prices at sub $90 level for a considerable time in future and this will be good for the consumer countries.