It’s no secret that the global oil industry is undergoing a major adjustment. Oil prices dropped precipitously during the summer of 2014 and haven’t really recovered as of yet. If anything, even further weakness is indicated as a supply glut continues to plague financial markets amidst a slowing global economy.
Now there’s a battle going on between the former world oil cartel OPEC and the U.S. shale oil revolution. OPEC has long been the world determinant of oil prices, with a huge market share of the industry and the ability to control supply as it saw fit. However, the entrance of U.S. shale oil has thrown the industry for a loop, with OPEC now controlling less and less of the oil market share. And the organization hasn’t been taking it lightly.
Despite the struggles of the global economy, OPEC has not reduced oil production. That has driven prices to seven-year lows, with even further drops in the near future likely. The idea is to keep oil low enough to make U.S. fracking cost prohibitive and drive these companies into bankruptcy so they can’t threaten OPEC’s dominance in the industry.
But the U.S. shale oil industry isn’t going anywhere anytime soon. Despite the pain OPEC is causing in oil values, the shale revolution is here to stay.
Why Fracking Will Survive OPEC's War
Under $60 per barrel is a dangerous place to be for fracking companies that have been profitable at this range or higher. As oil continues to trade in the $40 range and possibly even lower, many analysts have written off the fracking industry as a lost cause – others, however, see it in a different light.
Persistently low oil values have actually done the opposite of what OPEC intended. It’s making the industry leaner and more efficient. Adding to that is the U.S.’s goal of becoming energy independent, with which the fracking industry has been helping.
Technological breakthroughs are also helping to lower the cost of extracting black gold by way of fracking. The process is expensive, more than 10 times the price of Middle Eastern methods using conventional wells, so the ability to become more efficient and reduce overhead costs is vital to the industry’s survival.
OPEC’s plan to keep oil unreasonably low won’t last forever. Low energy costs mean higher earnings for businesses, which in turn means an economic boost. When that happens, the demand for energy will rise again and OPEC will have no choice but to raise prices. Oil trading in a stable range of $70 to $80 per barrel is very likely to happen once OPEC realizes the futility of its efforts.
The Bottom Line
It’s not just U.S. shale that’s threatening OPEC. Other newer competitors from Russia and Canada have been slowly gaining market share as well, meaning that OPEC is fighting a war against multiple adversaries.
As technology continues to advance, oil that had been previously thought locked away will become viable, decreasing OPEC’s market share even more. While short-term pain makes the industry’s outlook seem unclear, a long-term viewpoint says that the shale revolution is succeeding and will thrive in the next decade.
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