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U.S shale: the hunted becomes the hunter

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It’s all but confirmed: U.S. shale oil plays are now the world’s swing producer, replacing Saudi Arabia, OPEC’s de facto kingpin. But the road to this day wasn’t expected and for most analysts, the unexpected turn of fortunes now seems like a classic case of the hunter becoming the hunted.

From the early days of the last century when British secretary of the Navy Winston Churchill sought to modernize his nation’s fleet by converting war vessels from coal to oil, the Middle East has been eyed as the world’s most strategically vital region. In the past century, the economics of oil and the growing prestige and power of those who produced it weighed heavily on world affairs. Saudi Arabia, the world’s largest producer with a seemingly vast and endless reserve managed along with a dozen other countries to control well over half of the world’s crude, is cutting back on output to force oil and gas prices up or flood the market to drive prices down. Whether inspired by economics, politics or even religion, up until recently, when Saudi Arabia and OPEC spoke, the world listened.

But it was the near persistent price of oil, routinely priced at $100+ a barrel between 2007 and 2013, that gave rise to an unexpected technology that allowed the U.S. to see a reversal of its dwindling oil production fortunes from traditional drilling. Horizontal drilling and hydraulic fracturing showed promised in the same U.S. oil wells that were once thought to have been long ago depleted. “Fracking” was possible at $100 a barrel and for a time it helped a production resurgence, a resurgence well noted by OPEC and even a good number of non-OPEC nations who saw their market access to the lucrative U.S. market threatened. Led by Saudi Arabia, the century old oil dominance would put frackers to the test. In December 2014, Saudi Arabia opened the crude floodgates forcing oil down to as low as $26 a barrel 14 months later.

For a while, the strategy paid off. U.S. fracking rig numbers and output was halved, but so too was the revenue of OPEC members, whose national finances were more precarious and less diversified than their intended target. The experiment of flooding the market needed to be corrected and with agreement by some 24 nations reverse course and cut back on their oil output by some 1.8 million barrels a day, oil prices began once again to rise.

To the consternation of the OPEC/NOPEC cartel, the output cut only served to see U.S. drillers back in the oil fields, armed with better financing and lower cost operations that could thrive on $50 a barrel oil.

Not only is production rapidly approaching record levels in the U.S., but the effect of all this is a zero-sum game for the former oil kingpin, Saudi Arabia. That country has cutback oil output to cause crude values to rise and more American shale drillers will gladly ratchet up their production, denying any hope of reducing global oil stocks anytime soon. Desperate oil based economies are now forced to rethink their strategy, if not their membership in a cartel, whose raison d’etre has now come into question. With or without its attempts at steeper output cuts, they are facing something of a gordion knot in which a commitment to any action will likely cause greater turmoil and rancour.

The admission by a good number of oil observers and analysts this week clearly show that with the rise and dominance of U.S. shale production, the underdog has emerged triumphant, much to the delight of drivers.

Senior Petroleum Analyst, Canada

Dan is a skilled and noted bilingual (French and English) consumer advocate specializing in energy and current affairs. Known as Canada's “Gas Guru,” he founded tomorrowsgaspricetoday.com to better help motorists anticipate the price of gasoline in advance across Canada. He has over three decades of experience in the petroleum industry, as a parliamentarian and an analyst.