Lessons from the U.S. rise to be the world’s largest oil producer.
By Wall Street Journal Editorial Board
Dec. 14, 2018
(The Organization of the Petroleum Exporting Countries (OPEC)
Founded in 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela), and headquartered since 1965 in Vienna, Austria. As of September 2018, the 15 countries accounted for an estimated 44 percent of global oil production and 81.5 percent of the world’s “proven” oil reserves, giving OPEC a major influence on global oil prices that were previously determined by the so called “Seven Sisters” grouping of multinational oil companies.)
Remember when America’s political class fretted about “peak oil” and dependence on foreign energy? So much for that. The U.S. the other week for the first time in 75 years became a net petroleum exporter as the Organization of the Petroleum Exporting Countries wrangled over how to respond to America’s growing energy bounty.
U.S. crude production has surged 20% in a year and nearly tripled in a decade thanks to advances in hydraulic fracturing and horizontal drilling. American output is rising at the fastest rate in a century. Earlier this year the U.S. eclipsed Saudi Arabia and Russia as the world’s largest oil producer.
For nearly six decades OPEC has dominated oil markets by setting production quotas among its 15 members. In late 2014, OPEC flooded the market with oil in an effort to break U.S. drillers who were burning cash on mounds of debt. As oil prices fell below $40 a barrel in 2015-2016, many wildcatters folded or were absorbed by larger producers.
But the survivors became more efficient. Technology—including drones with thermal imaging to detect leaks along with improvements in horizontal drilling—boosted productivity. Over the last five years production per rig has more than tripled in the Permian Basin and quadrupled in North Dakota’s Bakken Shale. While the Bakken rig count has fallen by 70%, output has increased by a third.
Most American oil refineries have processed heavier crudes, which depressed prices for lighter, sweeter grades produced in the new wells. But in late 2015 the GOP Congress expanded shale-oil’s market by lifting the export ban on crude in return for Barack Obama’s demand to extend renewable energy tax credits. U.S. crude exports have since soared to 3.2 million barrels a day.
Many U.S. producers say they can turn a profit at $50 a barrel and even as low as $30 in the Permian’s most productive regions. Yet most OPEC members need prices ranging between $70 and $90 per barrel to balance their budgets. The cartel scaled back output in 2016, but shale producers roared back as prices recovered. America’s shale gusher has presented a quandary for OPEC and especially its largest member, Saudi Arabia, which faces large budget deficits as it works to contain Iranian influence in the Middle East.
Earlier this year, the Saudis obliged President Trump by increasing output to prevent prices from soaring with the reimposition of U.S. sanctions on Iran. Even so oil prices hit a four-year high in early October. But they have since declined 30% amid weakening world economic forecasts, sanctions exemptions and surging U.S. production.
OPEC and Russia last week agreed to scale back production collectively by 1.2 million barrels a day, but the meeting exposed the cartel’s cracks. Qatar quit amid hostilities with the Saudis. Small producers carped they were too insignificant to affect global supply. Algeria produces one million barrels per day, which is as much as U.S. output has increased in five months.
Saudi Arabia, Russia and allied producers agreed to shoulder the bulk of the cuts while Libya, Iran and Venezuela received exemptions. Some in the media claim the Saudis defied Mr. Trump’s pleas to keep oil prices low, yet U.S. shale producers are likely to benefit from OPEC’s cuts by capturing more market share.
One of the biggest constraints on U.S. production has been a distribution bottleneck. Hence West Texas Intermediate now sells at a $8 to $9 discount to Brent crude on the world market. But next year three pipelines capable of delivering two million barrels of Permian crude to the Gulf Coast are expected to come online. In 2020 two more pipelines that can carry two million barrels a day are expected to be completed.
Oil companies are also racing to build more export terminals to handle the supply gusher, which isn’t likely to stop anytime soon. The U.S. Geological Survey reported recently that the Permian’s Delaware Basin holds more than twice as much oil and 18 times as much natural gas as the heavier-drilled Midland region.
Barack Obama, hilariously, is now claiming credit for the shale boom. “You know that whole suddenly America’s like the biggest oil producer . . . that was me, people,” he said last month at Rice University. But drilling leases on federal land declined 28% during his two terms amid new restrictions on land use. Drilling skyrocketed on private land, despite attempts by his regulators to block pipelines, slow down approvals, and impose higher costs on production.
The Trump Administration is expediting pipeline and terminal permitting and opening new federal land to drilling. Last year’s tax reform unlocked Alaska’s Arctic National Wildlife Refuge. The Interior Department recently scaled back needless Obama protections for the sage grouse, which will allow drilling on nine million acres in oil-rich states. Leases are being snapped up at auction, even in areas where recoveries are now low and expensive. As technology advances, many investors expect the break-even price of production to fall.
Politicians in the past have sought to secure American energy independence with price controls, ethanol mandates and the oil export ban. But they and OPEC should note that America owes its new energy prosperity to industry innovation, private property, and the free market.
How America (i.e. President Donald Trump) Broke OPEC
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