OPEC's power wanes, but shale's impact is unclear

Three weeks after the Organization of the Petroleum Exporting Countries wrapped up its latest meeting in Vienna, the market still hasn't made up its mind about shale oil's effect on the cartel's supremacy.

The U.S. shale energy boom has rattled OPEC's grip on setting global crude prices, experts agree, but the extent of the impact is unclear.

"I don't see it being the end of OPEC, nor do I see oil prices crashing to $50, but I certainly don't see them moving much over $100," said William Fisher, a professor in the Department of Geological Sciences at the University of Texas, Austin.

Fisher holds the same basic opinion as many of his peers: Although OPEC as a whole no longer commands oil pricing, Saudi Arabia still does.

"It centers on the Saudis," Fisher said in an interview. "They're the only ones with real swing capacity to be able to impact the price if they need to make cutbacks to do it, or to increase it to make it up."


Fisher served as assistant secretary of the Interior for energy and minerals in the administration of President Ford and has experience witnessing how OPEC -- and Saudi Arabia in particular -- could manipulate global oil prices in a relatively short amount of time. But outside Saudi Arabia, the days when the smaller OPEC members could rally together as a whole to drive crude prices up or down are over, he said.

Saudis hold the reins

In Vienna, OPEC opted to keep production steady at 30 million barrels per day through 2013. But that hasn't stopped Saudi Arabia from flexing its muscles to help keep international benchmark Brent crude floating around $100 per barrel. State-owned Saudi Aramco has already cut back by around 600,000 barrels per day from where its output was a year ago.

Such a drastic shift in output is a luxury few of OPEC's 12 member nations can afford. Social programs in the major oil exporting states, paid for by oil revenues, have increased dramatically since the 1970s and '80s, and governments have become more dependent on social spending to keep the expanded populace in OPEC countries content.

The Saudis' dominance has fueled infighting among some OPEC member states, as African nations such as Nigeria are reeling from reduced export revenues exacerbated by lower U.S. demand (EnergyWire, March 8).

"Even with $100 oil, they can hardly meet their budget or their financial needs, because of corruption and incompetence," said Fadel Gheit, senior analyst covering the oil and gas sector at Oppenheimer & Co. "Money basically buys them time, but they are fighting the inevitable" decline in OPEC's relevance, Gheit said of OPEC's smaller producers.

At a discussion on global oil markets during a forum at Rice University earlier this month, experts said all signs suggest Saudi Arabia's leaders have opted to prop up prices even at the risk of encouraging more shale oil development.

Greg Priddy, director of energy and natural resources at the consultancy Eurasia Group, said an increasingly "well-supplied oil market" will likely push the Saudis to cut their output even further, to below 9 million barrels of oil per day.

Priddy is among other market watchers who believe oil prices are poised to decline sharply, unless Middle East unrest spreads. The civil war in Syria and worries of it spilling over into neighboring countries appear to be encouraging traders to keep oil prices above $90 a barrel today, but some industry experts argue that prices will soon begin trending downward.

Saudi Arabia may try to counteract this with further production cuts. Priddy said he believes the growth in oil supply, from shale and other expanding sources, will outpace demand growth in 2014 and 2015. "Out beyond that, it becomes much more of a question," Priddy said.

In its medium-term oil market report released last month, the International Energy Agency predicted 8.4 million barrels per day of global liquids production growth by 2018, with more than 70 percent of that added supply coming from non-OPEC players such as the United States.

But international energy companies doubt the influx of shale oil will overtake demand in the long run, given rapid growth in Asian energy markets.

John Watson, chairman and CEO of Chevron Corp., likened the constant need for new oil resources to running on a treadmill at a recent Center for Strategic and International Studies event in Washington, D.C. (EnergyWire, June 12).

He said Chevron, which has had an active upstream presence in Saudi Arabia for more than 70 years, thinks new shale supplies will be absorbed into the wider market, although he acknowledged that Chevron has been "a little light" in its unconventional oil forecasts so far.

"You're talking about 86 million barrels per day of oil that's produced [globally]," Watson said. "Tight resource [output] today is a little over 2 million bpd, and it's going to go to 4 [million bpd], and that's going to take 10 years or more. So if you put that into context, it's manageable. We don't believe that there's much surplus capacity in the world."

Watson echoed other analysts in agreeing that the Saudis hold the key to that little surplus capacity.

Business as usual

U.S. imports of OPEC crude are lower overall, with much less oil coming in from Algeria, Angola and Nigeria.

But oil from the Middle East is still flowing steadily, with levels about as high as they were back in 2007. Many in the industry deem that year as the unofficial start of the shale oil renaissance driven by technologies such as hydraulic fracturing and horizontal drilling.

That means that despite output from North Dakota's prolific Bakken Shale or Texas' Eagle Ford Shale, it's more or less business as usual for U.S. imports from OPEC's Middle East producers. The Energy Information Administration reports that the U.S. imported about 1.4 million barrels a day from Saudi Arabia in 2007. By 2012, that figure had barely changed, to 1.36 million barrels a day, and the most recent trend suggests the U.S. could end up importing more oil from Saudi Arabia this year than it did in 2007.

Imports from Iraq held fairly steady over the period, from 484,000 barrels a day in 2007 to 474,000 barrels a day in 2012. Crude imports from Kuwait have expanded by about 75 percent since 2007.

The EIA says this is because the U.S. shale oil is displacing light, sweet crude from Africa but not the heavier sour grades that refineries like. But the data also show that even Canada's heavier, oil-sands-derived crude isn't displacing Middle Eastern supplies headed to the United States -- at least, not so far.

From 2007 to 2012, imports of Canadian oil to the U.S. have grown by a massive 500,000 barrels per day. This flow appears to have had little impact on U.S. heavy oil imports from the Middle East's largest exporters. Whether the proposed Keystone XL pipeline would change this is unknown.

But some analysts have warned that OPEC's Middle Eastern giants shouldn't get too comfortable with business as usual. Not a single OPEC producer earned a "passing" grade from the Revenue Watch Institute's "2013 Resource Governance Index," and Saudi Arabia and Qatar both fared especially poorly (Greenwire, May 15).

With its high youth unemployment rate and rapidly growing population, Saudi Arabia may not be impervious to social upheaval.

"It is just not sustainable," Gheit said of Saudi Arabia. "You just cannot dream of $100 oil to bail you out -- that's not going to work. They've never diversified, they've never built an industrial base or a service industry.

"They'll get a wake-up call," Gheit added.

It's unclear whether U.S. shale production will form a key part of that wake-up call. But although U.S. shale oil may not yet be impacting oil prices, it is having an effect on oil pricing, argues Michael Webber, associate director of the Energy Institute at UT Austin.

"Even though it didn't move the needle a lot on prices, it sort of has a nonlinear affect on pricing power," he explained. "Even though prices are so high, OPEC's ability to set the price has been diminished a little bit."

Webber sees the U.S. taking advantage of this "wiggle room" that shale oil made available in terms of international politics. A coordinated embargo of Iranian oil, a response to the nuclear program there, probably didn't lead to a spike in prices due to increased U.S. output, he said, and North American shale oil may even make possible U.S. intervention in Syria less painful at the pump.

"It relieves some of the pricing pressure," Webber concluded.

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