OPEC vs US (Part II): Will US Shale-through or OPEC hit even?

OPEC vs US: When the seeds of ‘Oil Wars’ were sown

Being the largest energy consuming nation in the world, the United States of America has commenced securing its energy sources and resources for the times to come. The great economy consumes up to 25% of the world’s oil but has only 2% of the reserves. If there’s one way they want their energy supply to be permanently secure, they have to cut their dependency on external sources.

Shale bloom in the U.S.

US’s natural gas industry has undergone a significant transformation with the discovery of shale gas. It [the discovery] has provided the states with newer capabilities of self-sufficiency and has modified today’s global economic and political scenario. It has given much-needed energy independence to the United States than any other initiative previously, finding their investment in the research and development sector worth it with the discovery and a step ahead in achieving their aim to be an energy independent nation in near future. Just 28.3 billion cubic meters of this futuristic technology can warm up to 15 million homes in a year. It can generate 100 billion KW of electricity per year and when it comes to fuelling vehicles, 12 million can survive on this in a year (US Department of Energy, 2012).

For the first part of the rivalry between OPEC and US, click here

What OPEC should, can and would do?

With all that said, where does it leave the big names of Oil? As per several interviews conducted by CNBC’s Sri Jagarajah with oil and gas industry experts, if OPEC wishes to maintain a prominent presence in Asia, it must begin work on making its crude more competitive. Even though OPEC’s exports are seen to expand for the East, the US crude oil shipments to the cartel’s key market, Asia has been growing more so. The problem lies in the fact that nobody, as of now, is holding down the shale producers with any production cut issues whereas OPEC made an agreement to maintain a production ceiling of 32.5mn barrels a day in an attempt to rebalance the global demand and supply situation in order to control the prices. This proves to be advantageous to America as it takes this opportunity to supply its own domestic production. This threat that Shale oil poses on OPEC will continue to take place until the end of 2018 as the organization with its allies plans to extend it further.

In short, the present situation seems to be a serious dilemma for OPEC as Shale producers will fill up any supply shortages that appear in the market from the cartel’s side. Therefore, OPEC and partners can no longer afford production cuts because that would lead to loss of market share by Saudis to the United States of America. OPEC did extend the production cuts, however, it was too late. Shale, and hence the US, seems to have scored a decisive victory.

The night of rivalry and dawn of a new era, a futuristic insight

The rivalry between US’s newly emerging and the old-school kings of world oil has entered a critical new phase. The agreement between Saudi Arabia and Russia initially attempted to bring down the global oil supply and raise the prices to a range of $50 to $55 per barrel. The new player that’s trying to operate in the oil-demanding economy, Shale oil producers in the US  pose a clear threat to OPEC’s goal. The oil producers are learning to attain cost-effectiveness and other commercial efficiencies by extracting more oil with lesser gear and smaller work crews thereby giving tough competition to other suppliers. According to several industry experts, at the prices that OPEC decides to maintain for supplying oil, the production boom of Shale will be large enough to fill the rising gap of oil and gas demand and push the price of oil back to less than $50.

A fierce battle to monopolise the oil and gas market is anticipated between the US and OPEC. Nevertheless, the latter has much to be thankful for making 2017 the oil bullish year, as prices have recovered and markets appear to rebalance. This was possible due to the combined leadership of Saudi Arabia and Russia, backed by OPEC in the implementation of propaganda intended to amplify supply curbs.  Odds are that OPEC and partners will soon settle on further production cuts. Even though this can clearly be an open door invitation for the shale producers to fill in that supply, OPEC seems to be confident that such a threat from the US will be withdrawn. But just the Shale gas and a secure source of energy doesn’t mean that it’s the end of US’s involvement with the OPEC. Having found a new fossil fuel to complement its energy demands doesn’t imply that the economy can sustain its value in the international arena for long. However, it is not a final solution for the US American security portfolio. The importance of shale gas lies in providing the United States enough time to develop a sustainable strategy for achieving the energy independence. But it would be interesting to see which side, OPEC or US turn out to be more dominating in determining the course of oil and gas market. And for that, we need to let the future unravel itself because no matter what we believe or predict, it is the very nature of the industry to surprise every time like it has done so seamlessly in the past.