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Why The United States Rules Oil Prices... Not OPEC

Oil

There’s no end in sight to slumping oil prices - good news for consumers but a dire development for major oil producers like Saudi Arabia and Russia. And now, rising U.S. oil production and exports are contributing to the slump.

Last week, oil prices reached new lows for 2017, with Brent crude dipping below $48 per barrel and West Texas Intermediate dipping belo w $46. The drop has been attributed to an unexpected increase in U.S. crude inventories, which rose by 3.3 million barrels last week (according to the U.S. Energy Information Administration), despite expectations that it would drop by 3.5 million barrels.

The rise in production is compounded by rising U.S. oil exports, since the U.S. lifted a 40-year ban on these exports in 2015. This led to modest increases in oil exports in 2016 but substantial increases so far in 2017. This is a key reason prices will remain low in the long term.

Ebbs and Flows in U.S. Exports

It is worth remembering why the United States banned oil exports in 1975 (exceptions were allowed at the discretion of the president). 1970 set a record for the highest crude oil production in the U.S., though this record will likely be broken in the next two years. The U.S. was producing a lot, but it was also consuming a lot, forcing it to import more from OPEC states, which produced about 55 percent of the world’s oil in 1973.

This meant that OPEC could essentially control prices. And after the U.S. backed Israel in the 1973 Yom Kippur War, OPEC retaliated by raising oil prices. This created a fourfold jump in prices and a global oil shock. One of the many ways the U.S. responded was the 1975 Energy Policy and Conservation Act. This was designed to decrease its reliance on imports by banning oil exports, ensuring U.S.-produced oil would only be consumed domestically.


(Click to enlarge)

Fast-forward to today, and supply is no longer as big a concern. The U.S. has weaned itself off foreign oil, partly through technologies like hydraulic fracturing and horizontal drilling. In 2013, the US started producing more oil than it imported, and it hasn’t looked back. U.S. crude oil production has almost doubled since 2010 and is already surpassing forecasts for 2017. In late 2016, the U.S. Energy Information Administration estimated that the United States would produce 8.7 million barrels per day on average in 2017. New estimates suggest it will produce 9.2 million barrels per day in 2017 and up to 10 million barrels per day in 2018.


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But it’s not just the U.S. production numbers that are making waves: It’s the spike in U.S. crude oil exports. The U.S. exported 830,000 barrels of crude per day in March, a whopping 64.2 percent increase year over year. In February, it exported 1.1 million barrels per day, a nearly 200 percent increase year over year. According to The Wall Street Journal, the February numbers are closer to the new norm, as it expects the U.S. to export, on average, roughly 1 million barrels per day in 2017.

A Disaster for Oil Producers

This is a huge challenge for major oil producers, especially Saudi Arabia and Russia. In December 2016, OPEC and its oil-producing partners agreed to cut production by about 1.8 million barrels per day, or roughly 1.5 percent of global crude production at the time. OPEC, led by the Saudis, has largely made good on this pledge, reducing production by 1.1 million barrels per day in the first quarter of 2017. The Russians have played with the numbers cutting production compared with December 2016 levels but not in year-over-year terms.

The OPEC deal managed to stabilize oil prices around $50 per barrel, and last month the cuts were extended for another nine months. If it were still 1973, that might have caused a jump in oil prices. But in 2017, OPEC produces only about 40 percent of the global supply, and the U.S. is among the top three producers in the world. The price of Brent crude spiked to $54.15 per barrel after the cuts were extended but has since dropped almost 12 percent and may continue to fall. Related: The Downturn Is Over, But U.S. Oil Companies Face A Huge Problem


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This means that even the combined forces of OPEC and non-OPEC producers can’t prop up oil prices unless they are willing to slash production more severely. It also means that there is enough oil on the market, partly from the U.S., to satisfy demand, even when major producers limit their supply. Maintaining prices at current levels is the best outcome these producers can hope for. But even this comes with the downside of losing market share to competitors, without getting oil prices back to the levels that Russia and Saudi Arabia would need to stabilize their economies.


(Click to enlarge)

When we discuss U.S. power in the world, we often trot out a few key points: The U.S. economy accounts for just under a quarter of global gross domestic product; it has a military force without peer in the world; and its economy is not dependent on exports.

We can now add the following points to this list: The U.S. is the third-largest oil producer in the world; it is less dependent on oil imports than at any point in the last 40 years; and it is stealing customers from Russia and Saudi Arabia even with prices as low as $50 per barrel.

Even a few years ago, U.S. shale producers would have found it hard to make a profit at that price, but they are succeeding at that now. Oil prices are going down, U.S. oil exports are going up, and the ramifications will be global.

By Zero Hedge

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Leave a comment
  • robert on June 15 2017 said:
    The Opec and Russia has the pricing power. They have more pricing power now that in the past, when Opec was alone. There are Russia and 11 countries at russian leadership.
  • zorro6204 on June 15 2017 said:
    Whoa, slow down, the US still imports vastly more oil than it produces, roughly half from Canada and half from Opec plus or minus. If the US exports a million barrels, then that means either (a) US inventories decreased by a million barrels, or (b) we imported a million more barrels than we would have otherwise.

    Since we are a net importer, the only metric that matters to the global supply balance over time is US production, not exports.
  • david on June 16 2017 said:
    Robert and zorro are spot on. The US imports much more than we produce and the US is a young exporter and pale to comparison the alliance with Russia and OPEC.
  • zorro6204 on June 16 2017 said:
    Correction, I should have said we consume vastly more oil than we produce, and therefore we import a lot of oil. Imports and production are in the same ballpark, last time I looked.
  • RussRamey6 on June 20 2017 said:
    Purely supply and demand, OPEC and Russia do not have control, the partners cheat each other like bedouin bandits. The USA has the capacity and ability to take care of ourselves, bravo to the market, bravo to shale, a trail of tears to the authoritarians and theocrats who would control our prosperity. Ain't happening... especially with POTUS Trump at the helm.

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