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Robert Rapier

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OPEC’s Trillion-Dollar Bet Against U.S. Shale

  • OPEC's strategy to defend market share against US shale oil production has cost them trillions in lost revenue.
  • OPEC's strategy may finally be paying off as US shale oil production appears to be flattening.
  • OPEC's patience and persistence could result in regaining market dominance if US oil production declines.

Since 2008, the shale boom has grown U.S. oil production by about 9 million barrels per day. In the early days of the shale boom, when it wasn’t clear whether this development would have a significant impact, it was largely ignored by OPEC. By late 2014, as U.S. oil production growth was approaching 5 million BPD, OPEC decided they could no longer ignore it.

At its November 2014 meeting, OPEC announced it would defend market share that was being lost due to the rise of non-OPEC production, especially from the United States. It was a shift in strategy that I called OPEC’s Trillion-Dollar Miscalculation at that time.

The stated belief from some OPEC members at that time was that this would cause a dip in oil prices, and that would put a lot of the marginal shale oil producers out of business. Instead, oil prices plummeted, some shale oil producers went out of business, but the strategy indeed cost OPEC at least a trillion dollars of lost revenue as most shale producers held on.

In late 2016 the cartel waved the white flag, abandoning this strategy and returning to making production cuts to boost prices. That strategy persists to this day.

Since 2016, U.S. production has grown by another 4 million BPD, forcing OPEC to remain in production-cutting mode in order to defend prices. At its most recent meeting, OPEC extended production cuts into next year, but announced plans to start easing the cuts beginning in October 2024.

Whether they follow through will clearly depend on the supply and demand dynamics at that time. However, there may finally be reason for optimism within the group.

OPEC’s current strategy seems to be to keep production at a level that can support oil prices in a range of $80-$100/bbl. This becomes challenging if U.S. production continues to grow, which has been the case for the past 15 years. But, if they can hold out until U.S. shale oil production peaks and begins to decline, OPEC’s strategy may finally pay off.

U.S. production is 700,000 BPD higher than it was a year ago this month. However, production has been essentially at a plateau since late last summer. In August 2023, the U.S. produced 13.0 million BPD of crude oil. That gradually rose to 13.3 million BPD by the end of 2023 but has since declined back to 13.1 million BPD.

Unless there is a surge of production over the next couple of months, by August the U.S. will have essentially flat year-over-year growth in oil production. That has only happened twice in the past 15 years. The first time was during OPEC’s 2015-2016 price war, and the second was during the COVID-19 pandemic in 2020. If U.S. production is flattening, this would mark the first time since the shale boom began that it wasn’t caused by extraordinary external factors.

OPEC is certainly watching these developments. If U.S. production continues to flatten or even decline, OPEC’s strategy may start to pay off. Global oil demand continues to grow. OPEC might be able to start relaxing its production quotas while keeping prices high.

It’s important to note that OPEC countries possess 70% of the world’s proved oil reserves. Russia has another 6%, while the U.S. only has 4%. So, the U.S. and the rest of the world stand to lose economically in the long run if non-OPEC production declines and OPEC regains market dominance.

We have seen this situation previously. Leading up to the shale boom, U.S. crude oil imports were growing every year, and the U.S. was sending enormous amounts of cash to oil-producing countries. If that’s not what we want as a country — and I don’t think it is — we need to start making serious plans on how to avoid it.

By Robert Rapier

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  • Mamdouh Salameh on June 15 2024 said:
    OPEC+ doesn't need to bet against US shale oil since it doesn't pose a threat to it. US influence in the market relates primarily to US crude imports estimated at more than 8.0 million barrels a day (mbd).

    On the supply side, US influence is virtually non-existent because US production ranges from 7.0-8.0 mbd once 5.2 mbd of condensate and natural oil liquids (NGLs) have been deducted from the total. Moreover, the US claims to be exporting 2.94 mbd when in fact these are diluents exchanged for an equivalent volume of heavier crudes. Therefore, they aren't real exports.

    Three countries have immediate impact on the global oil market. They are China importing up to 13.0 mbd, the United States importing an estimated 8.0 mbd and India 5.0 mbd. Between them they account for 25% of global demand.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert
  • George Doolittle on June 15 2024 said:
    Again there is a "2nd energy boom" because everything is going all electric in the USA now. This is creating an all new type of economics in the oil extraction Industry in the USA and leading to a continued flood of energy product most spectacularly of natural gas not oil although in the latter there is most definitely that as well. This was all hugely inflationary until it wasn't can be readily observed as well meaning at one point a haircut cost over $1000.00 US Dollars in West Texas and this may still be true actually ... but for completely different reasons now. Point being the extant nature of US based natural gas needs to be pointed out as unlike oil based gasoline and diesel fuel natural gas is dirt cheap to distribute throughout all of the USA now and from the USA to the entire World most importantly of course being Canada, Mexico and Panama tho. #irony one of the biggest importers of US oil or was anyways until sanctions is/was Venezuela. Probably Columbia now. Either way product of all energy type excepting natural gas continues to flood into the USA on a truly massive scale now as both domestic and imported production combined is creating massive gluts in certain locales in the USA. This also excludes ethanol and methanol. Ethanol alone is one million US barrels per day of product in the USA . Distribution of both products is not an issue as well domestic USA even exports of methanol actually $meoh methanex

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