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Page added on April 23, 2015

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How OPEC could lose the oil wars

Public Policy

The U.S. energy industry is clearly on its heels. Drillers are shutting down rigs, oil and gas firms are slashing jobs and plunging prices are gutting profitability, even at huge firms such as Exxon Mobil (XOM).

But American drillers could ultimately benefit from the pressure to become more competitive. And OPEC, the oil cartel led by Saudi Arabia, may end up regretting its effort to push down oil prices and destabilize American drillers. “We’re wounded but we’re not dead, for sure,” Gary Evans, CEO of Texas-based driller Magnum Hunter Resources (MHR), tells me in the video above. “If their goal was to crush the US oil and gas industry, that isn’t going to happen. We are a very resilient industry.”

But American drillers could ultimately benefit from the pressure to become more competitive. And OPEC, the oil cartel led by Saudi Arabia, may end up regretting its effort to push down oil prices and destabilize American drillers. “We’re wounded but we’re not dead, for sure,” Gary Evans, CEO of Texas-based driller Magnum Hunter Resources (MHR), tells me in the video above. “If their goal was to crush the US oil and gas industry, that isn’t going to happen. We are a very resilient industry.”

Oil prices, currently around $57 per barrel, are about 45% below peak prices from last June. Normally, when oil prices fall, Saudi Arabia and other OPEC nations cut back production, to help support prices. But they haven’t done that this time, with aggressive levels of production largely viewed as an effort to force some U.S. drillers out of the market and make sure OPEC retains its global market share.

Saudi Arabia and many OPEC members can produce oil more cheaply than U.S. frackers, who rely on new horizontal drilling techniques that have led to a surge in U.S. oil production during the last five years. Most OPEC drillers can still make money with oil at, say, $50, while many U.S. drillers lose money with prices that low—which makes it a no-brainer to cut back production or stop drilling altogether.

The Saudi move seems to be working—but Saudi Arabia could also be more vulnerable than it’s letting on. Even though the oil glut caught mostly everybody by surprise and pushed storage levels near capacity, there’s not nearly as much oversupply as there was in prior oil busts. “We’ve only got one million to 1.5 million barrels per day of overproduction,” Evans says. “During prior busts we had 10 million barrels per day. The oversupply is not very much.”

Many analysts, meanwhile, think Saudi Arabia is producing about as much oil as it can, though the oil-rich nation doesn’t exactly spell out its true pumping capacity. If so, the current glut could end sooner than expected. Forecasters are generally predicting that oil prices will stay where they are, more or less, for the rest of 2015. But consensus expectations have been dramatically wrong before.

One consequence of falling oil prices has been stronger demand, with motorists driving more and some nations taking advantage of low prices to stockpile crude. Increased demand, of course, typically pushes prices up, and with U.S. drillers cutting everything they can think of, they’re bound to become more efficient and be able to profit at lower and lower prices. That could leave OPEC competing against a much leaner U.S. energy industry.

Stress on American drillers is also ratcheting up pressure on the federal government to allow oil exports, which have been banned since the 1970s. There’s no sign the Obama administration will agree to that any time soon, but energy analysts now say the domestic oil industry needs to be able to target new markets if it’s going to grow and create jobs.

“Exports to the globe are the last significant demand source for U.S. crude,” research firm Bentek concluded in a recent report. “Unchanged, the current U.S. crude export policy signals the end of growth in North America’s shale crude revolution.”

As drillers cut back, the oil will still remain in the ground, of course, and new innovations could help get it out at a lower cost, just as fracking itself proved that oil once thought unreachable could be extracted. “We have the technology,” says Evans. “We have the know-how.” It may just be uncomfortable for a while.

yahoo



10 Comments on "How OPEC could lose the oil wars"

  1. Plantagenet on Thu, 23rd Apr 2015 6:54 pm 

    It will be interesting to see if the Obama administration OKs US oil exports. So far they’ve been very accommodative to the US oil industry, and Obama has ALREADY issued waivers to the oil export ban law to Pioneer Exploration and some other well connected oil companies.

  2. Bob Owens on Thu, 23rd Apr 2015 7:28 pm 

    Where is our common sense? Missing in action, I am afraid. What sense would it make to sell our crude overseas into the teeth of an oil glut at prices less than the cost of production? No sense at all. Better to take our lumps, hunker down and use their oil at super cheap prices! But no, the oil companies want to export everything! The Wall Street investors will probably shut these companies down (bankrupt) before they can do much exporting. We may luck into a good solution. But it won’t be because we are smart.

  3. Makati1 on Thu, 23rd Apr 2015 8:16 pm 

    Exporting US oil is a joke. We already export some oil products, but not any appreciable amount and never will. When your customer cannot afford your product, you go out of business. The flip side of Capitalism nobody mentions.

    Yahoo is just another controlled mouthpiece for the Ministry of Propaganda and a pimp for Wall street. The sooner the system crashes, the better for all of us.

  4. anarky321 on Thu, 23rd Apr 2015 10:18 pm 

    “How OPEC could lose the oil wars”

    SA drills about 100x less wells for every barrel it produces and it’s costs are far far FAR below anything US Shale producers could dream of, its decline rates are FAR lower than a typical shale well, in 2 years the shale revolution is going to be a busted dream in the corner that MSM will try to avoid even bringing up

    so NO, SA can’t lose

    “We’re wounded but we’re not dead, for sure,” Gary Evans, CEO” – soon, Gary, soon…simple mathematics

  5. shallow sand on Thu, 23rd Apr 2015 10:59 pm 

    I wish they would look up Magnum Hunter’s earnings before quoting Mr. Evans. This seems like a recycled story. I read some of Mr. Evans’ quotes a while back and looked into the company. Not good.

  6. joe on Fri, 24th Apr 2015 12:35 am 

    It’s an interesting choice. Either Opec loses and several nations go down, or the US loses an industry using new tech that’s polluting everything as well as causing global warming. Hmm. In the end the market in find an equilibrium price for all players. It’s clear that no matter who wins, we all lose in the end.

  7. Mark Ziegler on Fri, 24th Apr 2015 11:42 am 

    Frackers will run out first. Perhaps they can export their garbage oil by-products that no one wants. Frackers better make up their minds and drill. Global Conventional oil is in decline.

    viewcrafters

  8. jjhman on Fri, 24th Apr 2015 6:25 pm 

    The only conceivble reason that US drillers may want to export is the spread between WTI and Brent. They have to be desperate to imagine that an extra 10 bucks is going to save their bacon.

    I’m sure the “expert” who wrote this column is unaware that all of the exported oil isn’t a drop in the bucket compared to what is imported.

  9. Nony on Sat, 25th Apr 2015 1:56 pm 

    SA is a low cost producer and has significant ready reserve. (I believe their 12.5 number, unlike the conspiracy theory nutters here.) They also have significant ability to long term add more production–imagine if they drilled things the way we do in the US. SA can win any market share battle with shale.

    What will happen is some equilibrium. Enough pain on the shale to get some decent fraction of them to stop. Not all of them (after all parts of the EF and Bakken are profitable at very low prices…small parts, but parts.)

    SA would love to just constrain supply and let price go up. They have a history of doing that. They just aren’t doing that now, since they know shale turns on gangbusters at 100. They will let price settle out around 65 or so after the glut is worked off.

  10. Nony on Sat, 25th Apr 2015 1:57 pm 

    The spread is a POWERFUL reason to want to export. Just ask Shallowsand if he would like an extra 5-10 buckes of price. Duh!

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