OPEC’s Trillion-Dollar Bet Against U.S. Shale

Since 2008, the shale boom has grown U.S. oil production by about 9 million barrels per day. In the early days of the shale boom, when it wasn't clear whether this development would have a significant impact, it was largely ignored by OPEC. By late 2014, as U.S. oil production growth was approaching 5 million BPD, OPEC decided they could no longer ignore it.

At its November 2014 meeting, OPEC announced it would defend market share that was being lost due to the rise of non-OPEC production, especially from the United States. It was a shift in strategy that I called OPEC's Trillion-Dollar Miscalculation at that time.

The stated belief from some OPEC members at that time was that this would cause a dip in oil prices, and that would put a lot of the marginal shale oil producers out of business. Instead, oil prices plummeted, some shale oil producers went out of business, but the strategy indeed cost OPEC at least a trillion dollars of lost revenue as most shale producers held on.

In late 2016 the cartel waved the white flag, abandoning this strategy and returning to making production cuts to boost prices. That strategy persists to this day.

Since 2016, U.S. production has grown by another 4 million BPD, forcing OPEC to remain in production-cutting mode in order to defend prices. At its most recent meeting, OPEC extended production cuts into next year, but announced plans to start easing the cuts beginning in October 2024.

Whether they follow through will clearly depend on the supply and demand dynamics at that time. However, there may finally be reason for optimism within the group.

OPEC's current strategy seems to be to keep production at a level that can support oil prices in a range of $80-$100/bbl. This becomes challenging if U.S. production continues to grow, which has been the case for the past 15 years. But, if they can hold out until U.S. shale oil production peaks and begins to decline, OPEC's strategy may finally pay off.

U.S. production is 700,000 BPD higher than it was a year ago this month. However, production has been essentially at a plateau since late last summer. In August 2023, the U.S. produced 13.0 million BPD of crude oil. That gradually rose to 13.3 million BPD by the end of 2023 but has since declined back to 13.1 million BPD.

Unless there is a surge of production over the next couple of months, by August the U.S. will have essentially flat year-over-year growth in oil production. That has only happened twice in the past 15 years. The first time was during OPEC's 2015-2016 price war, and the second was during the COVID-19 pandemic in 2020. If U.S. production is flattening, this would mark the first time since the shale boom began that it wasn't caused by extraordinary external factors.

OPEC is certainly watching these developments. If U.S. production continues to flatten or even decline, OPEC's strategy may start to pay off. Global oil demand continues to grow. OPEC might be able to start relaxing its production quotas while keeping prices high.

It's important to note that OPEC countries possess 70% of the world's proved oil reserves. Russia has another 6%, while the U.S. only has 4%. So, the U.S. and the rest of the world stand to lose economically in the long run if non-OPEC production declines and OPEC regains market dominance.

We have seen this situation previously. Leading up to the shale boom, U.S. crude oil imports were growing every year, and the U.S. was sending enormous amounts of cash to oil-producing countries. If that's not what we want as a country - and I don't think it is - we need to start making serious plans on how to avoid it.

By Robert Rapier

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