CRF Blog

The Relentless Production of Shale Oil Is Breaking OPEC’s Neck

by Bill Hayes

Peter Coy and Matthew Philips, writing in Bloomberg Businessweek, argue that The Relentless Production of Shale Oil Is Breaking OPEC’s Neck.

Theories as to why OPEC didn’t reduce quotas at its meeting in Vienna on Nov. 27 are as cheap and abundant as crude in North Dakota. One holds that the Sunnis of Saudi Arabia want to hurt the Shiites of Iran, who need high-priced oil to finance their government. Another, expressed by Russian President Vladimir Putin, is that the whole thing is a conspiracy to undermine Russia, the world’s biggest oil producer. Yet another is that the Saudis hope to drive oil prices below where it makes sense for American shale producers to invest in new production. But shale producers have lowered their costs so much that in key fields they can make profits at $50 to $70 a barrel. That’s above core OPEC members’ exploration and production costs but below what many need to cover their government spending. “If my calculations are correct, this will go down as one of the worst commodity trading decisions ever,” Wilbur Ross, billionaire investor and chairman of WL Ross (IVZ), wrote in an e-mail.

In fact, prices are being forced down not by any action (or inaction) of the Saudis but by the American shale producers, who are simply producing all the oil they can to maximize their profits. [more]