US shale energy boom cuts OPEC ability to ramp up crude oil prices

Shale gas imageThe ability of US shale oil producers to quick pump up output – and to just as quickly reduce supply – is presently acting as a brake on the monopoly power of Arab-dominated OPEC cartel to unilaterally determine crude oil prices.

And the US shale oil boom has been a major factor in lowering the price of Brent crude – the global oil price benchmark – thereby reducing energy prices around the world and re-asserting the USA’s position as the world’s leading oil producer.

This analysis of the US shale oil boom was presented in his congressional testimony to the US House of Representatives Committee on Energy and the Rural Economy by Jamie Webster, Senior Energy Director for IHS Inc. (NYSE: IHS), the economic and business analyst.

He said that the catalyst for the oil price decline that started last summer was the partial (and temporary) return of Libyan production.

But it was the near-doubling in US oil production from 5.6 million barrels a day (MMb/d) in 2011 to the current 9.2 MMb/d that sustained this price drop.

OPEC’s decision in November 2014 to not cut production in the face of growing volumes, not just from United States shale oil, but also the Gulf of Mexico as well as Canada further hastened the price decline. He explained:

“OPEC’s decision, reaffirmed again in June, appears to have marked the beginnings of a serious shift in how supply and demand is balanced in the global market.

“The boom in US production has the potential to upend the need for a formal market balancer, leading to lower oil prices for consumers, while increasing energy security for not just the US but the world.

“This is possible not only because of the large production volumes that US producers have brought to the market, but because of the character of those flows.

“Conventional production projects can take years to finance, plan and bring to the market. US shale producers can do it in 4 months.”

Since 2008, American entrepreneurship has increased US crude oil output by ~ 81% — 4.4 million B/D principally of light tight oil, such as Eagle Ford in south Texas, Bakken in North Dakota and West Texas Intermediate (WTI). 

This increase is the fastest in US history and exceeds the combined production gains from the rest of the world, and the United States now has the fastest growing oil production the world.

Webster added: “Globally, conventional production has a decline rate of 5-6%, meaning a project will be producing that much less each year.

“US shale production has an initial decline rate of about 50%. These two factors allow the US shale system to react quickly to market signals to bring more oil onto the market, and a lack of investment when prices turn downward can quickly reduce supply.”

With a market-driven supply – demand curve now operating (at least in part) in the oil market, if supply increases, prices will drop.

Meanwhile, Goldman Sachs has this week reiterated its bearish view, forecasting crude oil prices will fall to $45-barrel by October.

Earlier today Brent crude was floating around $57-barrel – down 5% from last week.

Pixie Energy

Pixie logo Pixie Energy is an incubator and a facilitator of strategic research and project work, focusing on energy regulation, policy and markets at the local and national level. Find out more about Pixie Energy here.

Local Energy Matters: Scotland

Local Energy Matters: Scotland is a free-to-download brochure with a focus on energy tariffs in the two Scottish electricity distribution regions, as well news on local energy and low-carbon schemes.

Previous editions can be download here.

Scottish energy market overview

You can read an overview of the Scottish energy market here.

Scottish Government energy feed