OPEC vs SHALE : WHO WON THE BATTLE ?

Oil prices took a huge dive from over $130 a barrel in July 2014 to near $25 a barrel in February this year. And it is mainly due to Saudi Arabia continued to pump more and more oil to kick out high cost producers especially the Americans.

The Rise of OPEC : 

Post World War II , the oil market was dominated by a group of multinational companies better known as "The Seven Sisters" , most of them was headquartered in the US. To spur consumption those companies announced significant cuts in the oil prices unilaterally. As a result the economies of the oil producing countries deteriorated. In order to respond to the actions of the US based companies

the governments of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela formed the Organisation of Petroleum Exporting Countries or OPEC. Their mission was to coordinate oil policies and stabilize oil prices. But in 1973 the OPEC announced significant cut in oil production and announced "Oil Embargo" against USA , resulting a sharp rise in oil prices from $3/barrel to $12/barrel. Thus OPEC which produced more than half of the global oil was successful in driving the prices up and hurting the US economy.This event had far reaching effect on oil prices. Thus the balance of power was shifted to the countries comprising OPEC.

 

OPEC Looses the Upper Hand :

But the discovery of shale oil has helped America to produce record level of oil and reduce their dependency on OPEC.Abundant amount of oil and gas has been extracted from underground rocks by a method known as "Fracking". They were enjoying the high prices of oil and swimming in profits. The predictions of oil reaching $200 a barrel aroused more enthusiasm among them and they took bank loans to invest in shale oil fields.Further the Iran-US Nuclear deal and lifting of economic sanctions on Iran resulted in pumping more oil into the market, resulting a reduction of market share of OPEC counties and their influence.

Reply From OPEC: 

To gain market share and their lost glory OPEC had to force high cost drillers out of business. Their plan was simple : to pump huge amount of oil into the market. More the supply , less will be price and the lower the price of oil , the less profitable will it be for the US shale drillers. Now with continuing over-supply of oil the prices has reached $30 a barrel, US shale oil producers are facing imminent bankrupt as the loan they took during the boom period  became too costly to bear during the gloomy scenario. They were forced to cut production and their stock prices went for a toss.

                                        

The Bottom line :

As Iran refused to cut production as they want to gain market share after economic sanction on them was lifted the oil glut will continue and the low prices will remain. Saudi Arabia will not welcome this as prolonged low price will also hurt their economy and their motive to regain market share will fail. Russia , Nigeria  and Venezuela have to produce more oil at low prices as their economy majorly depends on revenue from exporting oil. So the competitive pressure on Saudi Arab will remain. Further the US shale drilling technology has improved a lot in the last decade and if the price reach $40 -$45 a barrel they will be profitable , a significant improvement from the past when they need at least $60 a barrel to  break even. 

Thus the global economies of oil have changed. Market will be less subjected to the whims of the Sheikhs. US shale industry will continue to be a major competitor to the Saudi Arabia. The major beneficiary of the low priced oil will be the consuming nations such as China and India. They will have extra money and those can be used for capital expenditure and that will boost their GDP. This effect is most pronounced for our country as the government will be able to boost exchequer by not only weaning off the oil and kerosene subsidy but also imposing excise duty on petrol and diesel prices. The inflation will be lower , consumer spending will increase and more discretionary spending power will have far reaching positive impact for our country,


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