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OPEC and U.S. Oil Producers Come To An Understading

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Five years ago, they were sworn enemies. OPEC (Organization of Petroleum Exporting Countries) was at war with U.S. shale producers who, thanks to new oil extraction techniques of hydraulic fracturing and horizontal drilling known as “fracking”, turned the tables on OPEC’s once dominant position as the world’s pre-eminent swing oil producer.

In a matter of years, the U.S. had managed to begin tapping its vast light tight shale oil, reducing its domestic consumption of oil imports from OPEC nations, all the while setting the stage for what OPEC saw as an existential threat to its once undisputed mantle as the world’s only major exporter of valued crude.

In what can be best described as a failed plan, OPEC attempted to undermine the new shale upstart producers by unleashing a deluge of oil onto global markets which from October 2014 to February 2016, saw oil lose three quarters of its value to land at $26 a barrel. But if the gambit was designed to hurt U.S. light oil producers, it backfired and hurt OPEC nations. whose finances were more dependent on oil revenues than the intended shale oil upstarts. Venezuela, Iraq, Nigeria, and even the Gulf States were in trouble and needed to close the proverbial Pandora’s box they had opened. The solution came in production output quotas with the cooperation of Russian and 12 other non-OPEC producing nations who, with OPEC’s commitment, managed to reduce the global glut in a matter of 18 months to the balance seen today in fundamentals.

As oil prices have risen rapidly in response to the rebalancing of global oil supply and demand, there’s a renewed concern expressed in many corners, including the U.S. President himself, that the rapid rise risks undermining world economies and if not properly addressed by producers collectively, could set in motion a destruction in demand that would send oil prices retreating to their early 2016 lows. Not surprisingly, therefore, according to Reuters, “OPEC and U.S. representatives have met at least twice this year, with a third high-profile meeting set for Vienna next week. Finding the optimal balance of crude supply and demand will be a hot topic.”

While serious anti-trust laws in the U.S. would prevent even the slightest chance of cooperation, the openness between American oil producers and OPEC is radically different from the adversarial tone that once existed. No longer does one see the other as a mortal enemy and indeed with the U.S. now exporting 2 million barrels a day since the lifting of exports in 2015, an era of mutual respect seems to have developed. Emerging common challenges affecting future oil prospects, such as the growth in electrification, changes to marine vessel fuel standards, the so-called IMO in 2020, and wider geopolitical channels for discussion over common issues, unites more than divides. But it is perhaps the common interest of oil price stability that remains perhaps the most important catalyst in the need for more dialogue.

In search of stability, oil producers globally have had their share of the effects of volatility. For consumers and oil producers alike, there’s more advantage in cooperation than in chaos.

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.