Steve Levine has a blog post discussing the idea that the “unfolding new age of fossil fuel abundance” will have profound effects on various things, including OPEC:

With prices dropping and competing supplies flowing from numerous new producers, OPEC will lose much relative influence, and may simply cease to be a pivotal economic player. “OPEC will descend into chaos as an organization,” said John Hofmeister, former president of Shell USA. “They don’t know now how much they are hated by the entire world. But they will find out as things unfold.”

The key factor behind this kind of thinking is the rapid rise of production of oil from tight rocks like the Bakken in North Dakota and the Eagle Ford in Texas.  I haven’t taken a strong position on what the limits of production are from these sources – it just isn’t clear to me yet from the data that I have available.  But we could certainly place some limits on how much geopolitical impact this could have on OPEC.

Let’s posit, for the sake of argument, that tight oil plays in the western world could eventually produce 20mpd of oil.  This is a much larger number than I’ve heard from any analyst, so should presumably allow us to explore maximal benefits from this type of play.  However, let’s also posit that this 20mbd of potential supply is only profitable at oil prices better than $75 (since these plays are very input intensive and require a high oil price to work), and let’s also posit that the individual wells decline rapidly – say 50% y-over-y – as this is also a characteristic of these plays; they require constant new fracking of new wells to squeeze oil out of rocks in which it won’t naturally flow very far.

These numbers are not intended as particularly accurate – just a thought experiment to allow us to get at the essentials of the situation.  Now, what is implied by this picture?

Well, firstly, this cannot result in sustained oil prices much below $75.  A drilling boom could certainly overshoot and result in too much supply and collapse prices, but that oversupply could not last very long.  Since these wells decline rapidly, once oil prices go below $75, drilling will largely stop, and the available supply will quickly contract until prices can again be supported at or above $75.  This is in contrast to the situation in the 1980s when oversupply came from new sources in the North Sea and Alaska which were not resource plays: once a decent sized field was on plateau it would continue to produce for years unless oil prices fell very low indeed.

So, from this argument we see that what we would expect here is just enough of the 20mbd would be developed at any time to meet the demand of the global economy at an oil price of $75.  This amount of oil would increase over time, of course, as the world economy grew.  There might be price fluctuations to either side, but they could not be long-lived.

Now, let us ask: does Saudi Arabia, say, have less leverage over the world in this scenario?  Let’s say the world is producing 100mbd (including 10mbd of new supplies from tight oil) and Saudi Arabia is also producing 10mbd of that 100mbd still.  Do we still care critically about the stability and good graces of the Saudi regime?  I think we do.  10mbd is still 9% of global supply in this scenario, and there is no reason to suppose that oil demand will suddenly become highly elastic, so it’s still the case that if that Saudi 10mbd were to disappear, oil prices would increase by a large multiple.  True, that 10mbd might potentially be made up from the unexploited tight oil, but that is something that would take years to accomplish, and in the meantime, the global economy would suffer dreadfully.

In short, I don’t see how this new source of oil supply can result in large amounts of spare capacity (at least for any length of time).  And without large amounts of spare capacity, the basic dynamic at play presently – oil demand is inelastic so that any large supplier going offline creates an economic crisis – will not change.  Therefore, OPEC will continue to be a highly influential body, and the world will continue to care critically about the stability of major oil producers.