At last month's meeting of the Organization of Petroleum Exporting Countries, the 12-nation cartel faced an unusual set of challenges. Global oil prices are on the decline and may soon fall to levels that leave most OPEC countries unable to compete.
The main causes of this trend are depressed global demand for hydrocarbons and new energy finds around the world, including the historic surge in U.S. oil production — an unanticipated development that, for the last few years, has threatened OPEC's once-unrivaled position in the global oil economy.
America's energy renaissance, driven by the shale energy boom, hasn't just strengthened our domestic economy, it has shifted the global energy market's balance of power in America's favor, and OPEC is struggling to react to this new reality.
Oil is now America's top export category, with output at a 30-year high. And according to a new analysis from Citi, U.S. oil and gas exports could exceed 5 million barrels per day by the end of 2014 — a five-fold increase from 2005. The widespread adoption of techniques for extracting energy resources from shale rock formations has helped support more than 2 million jobs in the U.S and contributed $283 billion to our economy in 2012.
America's oil and gas boom has reshuffled the global energy market dramatically. This is worth celebrating for a number of reasons.
First, it marks the end of America's energy dependence on volatile foreign nations, and the insecurity that comes with it. As the United States continues to erode OPEC's global market share, it is also diminishing the group's outsized influence over the world's oil economy. This trend also gives Washington leverage to confront the adversarial energy policies of Russia and Iran who depend excessively on energy exports and use them for nefarious political purposes.
At the same time the globalization of energy markets with new sources from Africa, the Middle East and Asia constantly coming on line keeps prices low and suggests that when global demand resumes it will not cause major price rises.
Although OPEC has done its best to downplay the significance of rising U.S. production, that position is proving increasingly untenable. In its most recent World Oil Outlook, for instance, OPEC predicts that its global oil market share will fall by 5 percent by 2018. The forecast reflects the cartel's expectation that U.S. shale production will be greater than previously estimated.
Russia, Mexico and Venezuela have also tried unsuccessfully to stop the fall in energy prices. But they, especially Russia, cannot formulate a coherent response to the crisis. Russian oil company Rosneft threatened to cut oil production, but the Russian government and others had to agree that they would not do so.
Growing U.S. output has also led Saudi Arabia — OPEC's top oil producer — to cut crude prices for the American market for two consecutive months. This decision — combined with the fact that prices for Brent crude, the global benchmark, have reached a four-year low of just below $70 a barrel — has placed many other OPEC members in a compromising position.
According to Archie Dunham, chairman of the oil and gas firm Chesapeake Energy Corp., most OPEC members lack the necessary cash to deal with oil prices below $80 a barrel. Moreover, OPEC failed to restore higher prices at its recent summit partly out of concern that Saudi Arabia would not raise prices. Indeed Riyadh is following traditional Saudi script by challenging Russia and shale producers including other OPEC members — namely Iran — by cutting prices to regain its traditional market share.
Unlike OPEC, U.S. oil producers don't seem fazed by falling prices. The Energy Information Administration's latest report finds that in December domestic production will increase by 125,000 barrels over November. Still, there are signs that falling prices may affect future shale investments negatively.
Many U.S. producers have been so effective at cutting costs that prices below even $70 a barrel still leave room for profit. Houston-based EOG Resources can withstand prices as low as $40 a barrel for the oil it sources from Texas' Eagle Ford Shale, according to the company's Chairman and CEO William Thomas.
Nonetheless this is hardly true across the board, and we must carefully monitor future trends.
Meanwhile OPEC's current predicament is encouraging proof that America's energy dominance — and the benefits it entails for our country — is no anomaly. It is, in fact, the new normal, one that even OPEC must come to terms with.
Stephen Blank is a senior fellow at the American Foreign Policy Council. He can be reached at firstname.lastname@example.org.