This article was published in Scientific American’s former blog network and reflects the views of the author, not necessarily those of Scientific American
On Thursday, the Organization of Petroleum Exporting Countries (OPEC), an economic cartel responsible for approximately one third of global oil production, announced it would not decrease its rate of oil production. The announcement comes despite steadily decreasing global oil prices over the past several weeks, indicating that OPEC and its chief member Saudi Arabia are fighting to stay relevant in an oil market increasingly dominated by production from U.S. shale.
Shale is the term for underground rock formations that hold a wealth of oil and gas deep inside their pores. Until recently, it was impossible for U.S. drillers to extract enough oil and gas from shale rock to make up for the high cost of drilling a well. That all changed around 2007 or 2008, when drillers discovered they could extract far more oil and gas by drilling long, horizontal wells and then pumping just the right mix of water, sand, and other chemicals to fracture the shale and hold open a path for oil and gas to rise to the surface. U.S. oil and gas production has increased ever since.
The rise in U.S. crude oil production since 2008 is already threatening to dethrone Saudi Arabia from its position as the number one global oil producer. Analysts suggest that U.S. crude oil production could eclipse both Saudi Arabia and Russia as soon as 2020. While federal law established during the oil crisis of the 1970s still bans exporting U.S. crude without approval, at least one company has already moved to skirt the law and export lightly processed crude without the blessing of the federal government. And just yesterday, speculative U.S. presidential candidate Jeb Bush told the Wall Street Journal’s CEO Council he backs lifting the export ban “at the appropriate time.”
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By holding production steady amidst very low global oil prices, Saudi Arabia and its OPEC allies have indicated that they will not take the U.S. assault on their market share lying down. Despite all the advantages of advanced U.S. hydraulic fracturing technology, Middle Eastern oil still has a definitive advantage: production cost. While OPEC countries could tolerate oil prices as low as $60 per barrel, analysts predict the U.S. will see a decline in new drilling if the price falls below $70 per barrel.
In the wake of OPEC’s announcement, the U.S. West Texas Intermediate crude oil benchmark price fell below $66 per barrel—right into the sweet spot between $60 and $70 per barrel that OPEC hopes will curb U.S. oil production.
While OPEC’s announcement might spell trouble for some U.S. drillers in the short term, the average U.S. consumer stands to benefit. As OPEC influences the global oil price to maintain its market share, the U.S. Energy Information Administration (EIA) predicts the consumer gasoline price will fall from an average of $3.39 per gallon in 2014 to just $2.94 per gallon over 2015. Consumers around the world will see similar benefits. In fact, OPEC and Saudi Arabia are partially banking on the fact that low global oil prices will stimulate China’s sluggish economy and increase its demand for Middle Eastern oil, according to Jim Krane, a fellow at Rice University’s Baker Institute for Public Policy.
What do low oil prices mean for renewable energy and alternative transportation fuels? In the short term, there will be less direct incentive for consumers to adopt technologies like electric and natural gas vehicles because of the low price of conventional gasoline. However, it is unlikely gasoline prices will stay low over the long term, because some OPEC countries could not withstand a prolonged period of lower oil revenues. Based on the gasoline price trend over the past several years, I doubt many U.S. consumers will bank on gas prices staying low—so don’t invest in Hummer just yet.
Because the U.S. produces just one percent of its electricity using oil, the oil price does not have a direct impact on renewable energy technologies like wind and solar energy, so U.S. renewable energy developers shouldn’t fret about low global oil prices. What does impact renewables is the price of natural gas, which is used to produce 27 percent of U.S. electricity. Because the U.S. doesn’t export natural gas (yet), the U.S. market has a glut of natural gas, so the price is already quite low and is unlikely to decrease further. So while OPEC’s actions shake up the global oil market, they won’t impact U.S. renewables unless they indirectly cause the domestic price of natural gas to fall.
How long can OPEC sustain undercutting U.S. drillers? Only time will tell. Regardless, OPEC’s decisive action to recapture its market share illustrates just how much the global oil market has changed since the emergence of production from U.S. shale.
Image Credits:
Hydraulic fracturing illustration by Al Granberg for ProPublica.
Oil price index - CNBC.
Featured image - photograph by Daniel Foster, Flickr.