Delayed gratification is said to be a sign of maturity. By that standard OPEC at age 55 demonstrated its maturity this week as it left oil production quotas for its members unchanged. It did so in the face of oil prices that are about 40 percent lower than they were at this time last year, delaying once again a return to the $100-per-barrel prices seen during the past four years.
Why OPEC members chose to leave their oil output unchanged is no mystery. The explicit purpose for keeping oil prices depressed is to close down U.S. oil production from deep shale deposits–production that soared when oil hovered around $100 a barrel, but which is largely uneconomic at current prices. That production was starting to threaten OPEC’s market share.
If OPEC were to cut its oil production now and drive prices back up, it would only lead to increased drilling in the United States and loss of market share. In fact, even as spot oil prices sank below $45 per barrel in the United States earlier in the year, investors continued pumping money into U.S. oil drilling. According to The Wall Street Journal U.S. oil companies sold almost $17 billion in new shares in the first quarter of 2015, more than they sold in any quarter last year when prices were much higher.
Preliminary estimates by the U.S. Energy Information Administration show that oil production continues to grow in the United States despite low prices. (The final numbers won’t be in for months.) New investors in U.S. oil company shares must believe they are catching the bottom and will have a very profitable ride up from here. This demonstrates that OPEC’s work is not done and accounts in part for the decision to leave production quotas unchanged.
OPEC’s next task is to convince those making new investments in oil that rather than catching a bottom in oil prices, they have caught a falling knife. The cartel must dampen enthusiasm for investment for the long term if the organization’s members are going to benefit. A crippled U.S. oil industry without friends in the investment world is the only way to assure that rising prices won’t simply lead to a stampede back into U.S. shale deposits.
How long will investors in those deposits have to suffer before they say, "Never again"? My guess is at least another year. And, the pain for those investors might get much worse in the meantime. With the prospect of a nuclear agreement between Iran and the United States and Europe, Iranian oil exports could ramp up considerably as economic sanctions end. Disruptions elsewhere–Nigeria, Libya, and Iraq, for instance–might ease and further add to world exports.
For Saudi Arabia, OPEC’s largest exporter, winning the oil price war with U.S. producers in the next year may be part of a broader strategy meant to maximize Saudi revenues as production in the kingdom hovers at an all-time high over the next decade before beginning a decline.
The Saudis have already said they have no plans to expand beyond their current capacity of around 12.5 million barrels per day. Is this because they choose not to or because they can’t? Only the Saudis know. The idea that the country is essentially on a production plateau that may not last for the long term would explain why the Saudis want to crush the U.S. domestic oil industry now rather than wait for declines in U.S. production expected after 2020.
Under this scenario the Saudis want to raise prices while maintaining their current volumes well before then in order to take advantage maximum all-time flow rates that could be over by the mid ’20s. This scenario has major implications for a world that as recently as 2011 was counting on more than 15 million barrels per day from Saudi Arabia by 2035.
Image: Exxon tanker in desert. Satirical image meant to illustrate peak oil. Photoshopped by azrainman (2007). Via Wikimedia Commons.