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Despite Shale, OPEC Still Matters

Despite Shale, OPEC Still Matters

The chief economist at the International Energy Agency said the Middle East will remain central to the international oil markets despite gains from North American shale. A slump in production from key North African producer Libya rattled the markets earlier this year, though OPEC's market report next week should reflect a modest recovery. Lawmakers in the United States, meanwhile, reviewed prospects for further oil gains by considering transboundary resources in the Gulf of Mexico. Though North American markets are pulling away from foreign market, the IEA said OPEC producers should still hold a key stake in a changing oil game.

U.S. lawmakers heard testimony this week from advocates and policymakers alike on an agreement that would facilitate oil and natural gas exploration along the maritime border in the Gulf of Mexico between the United States and Mexico.  Sen. Lisa Murkowski, R-Alaska, ranking member of the Senate's energy committee, said the United States and Canada are "joined at the well" and the same relationship should exist with Mexico in order to guarantee North American energy security. Mexico, however, is struggling to realize its full potential because some of its fields are in decline. Nevertheless, the U.S. State Department's international energy chief, Carlos Pascual, said with billions of barrels of proven reserves at stake, a better relationship with Mexico would be a "win-win" situation.

Related article: Record Oil Outputs in Saudi Arabia Fail to Ease Shortage Anxiety

The U.S. Energy Information Administration said domestic oil production should reach 8.4 million barrels per day by next year, which puts the United States in the same conversation as Saudi Arabia. OPEC, feeling the squeeze from a U.S. market demanding less and less of its oil, said it would examine North American prospects in its global assessment, due in November. For now, OPEC Secretary-General Abdalla el-Badri said he didn't think the 12-member cartel was in trouble.  Libyan oil production is recovering and demand centers are shifting away from North America. Apart from a growing appetite from Asian economies, OPEC in its last monthly report said it expected Middle East oil demand would increase nearly 3.9 percent next year, the most of any other region. Demand from the Americas for next year increases by 0.4 percent by comparison.

The United States is limited in terms of its export potential because of legislation passed in response to the 1970s Arab oil embargo. Its reliance on that Middle East oil has faded, meanwhile, because of production gains from shale.  OPEC's Badri said he expected the shale boom in North America should hit its peak by around 2018. If oil prices were to retract substantially, he said, the cost of production from shale might force it out of conversation altogether.

Fatih Birol, the IEA's chief economist, addressed the consequences of North American shale at an international oil and gas conference this week in London.  He said oil production from the United States in particular didn't mean much for OPEC, which meets about 30 percent of the world's appetite for oil.  Policymakers in North America say more self-reliance is good insurance in a market vulnerable to overseas shocks. With demand centers shifting elsewhere, however, OPEC, and many of its Middle East members, is still a first-string player.

Daniel J. Graeber of Oilprice.com




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