Last year the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, initiated an economic oil war against the United States when it refused to cut production in November of 2014 like it usually does when oil prices drop. This was an attempt to drive some U.S. shale oil producers bankrupt and stem the flow of North American shale oil onto the global market.
In fact, OPEC actually increased oil production in November, which drove oil prices down to nearly $50/bbl, the price at which many shale producers can’t even break-even. But it hasn’t quite worked out the way they wanted.
In fact, I think they’ve lost this war by inadvertently making the U.S. shale oil industry leaner and meaner.
The deliverability of Middle East oil is just not there in the long-term,” says David Zusman, Managing Partner of Talara Capital Management, with whom a long discussion generated a clearer picture of what is coming for the future of oil. “The EIA has global oil demand in 2020 and beyond being met with increased supplies from a region of the world stuck in a multi-decade crisis that is likely to get much worse before it ever gets better.  Supply from the short-cycle U.S. oil market is required to balance the global crude market at a rate where U.S. shale should remain a growth industry.”
Most likely, oil prices will remain reasonably low at somewhere around $70/bbl, and natural gas prices quite low at about $3.75 per mmcf, for many years – which is good for the American consumer, even if it might be bad for the environment.
From a production standpoint, this oil war pits conventional oil against unconventional, sort of like jelly donuts versus tiramisu (see figure below).
While over half of the proven oil reserves are generally under the control of OPEC, there are many more unconventional reserves, such as oil shale, heavy oils and tar sands, outside the Middle East (see 2nd figure below). And most of these are on the edge of affordability.
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