May 31, 2013

With new engineering resources sending North American oil production skyrocketing upward, the Organization of the Petroleum Exporting Countries is left trying to decide how to respond. According to The Wall Street Journal, thedebate has proven intense and extremely divisive, particularly for an organization often characterized as the monolithic overseers of the oil market.

For many years, the official reports from OPEC did not even discuss the potential of new unconventional oil resources in countries like the U.S., notably the shale reserves that have recently been unlocked with engineering solutions like horizontal drilling and hydraulic fracturing, or fracking. But, last year, the group was forced to admit for the first time that these new resources were starting to have an effect on global markets, potentially cutting into demand for its member nations' crude oil.

Since then, organizations like the International Energy Agency have come out with new projections suggesting that the U.S. could ultimately surpass Saudi Arabia as the world's largest oil producer. Meanwhile, some OPEC members are already feeling the pinch from shale developments, and have started calling for action.

Little hope for an organized response
With oil prices starting to slump early this year in response to disappointing economic news, the Journal reports that some of the harder hit countries in OPEC have begun calling for concerted action to help prop up the price. That would mean cutting back on million of barrels per day of oil production.

The problem with this, and the source of most of the tension coming out of OPEC, is that the country's best able to manage a production cut are the ones who have seen the smallest impact from rising shale oil production.

The worst hit country has been Nigeria, whose light sweet crude oil is coming into direct competition with shale oil from the Bakken in North Dakota. American oil imports from Nigeria have plunged by more than 60 percent from 2007, before the start of the financial crisis.

Saudi Arabia, on the other hand, produces mostly heavier and more sulfurous crudes and has actually seen a fairly notable increase in exports to the U.S. since 2009, and only a minor decline from 2007 numbers.

Saudi Arabia struggling too
Despite the much better comparative position of Saudi Arabia compared to many of its other OPEC allies, Foreign Policy's Gal Luft notes that the country is still going through a serious internal debate about how to respond to rising American threat.

That is not to say that the country is considering scaling back its production the way that Nigeria, Iran and several others are hoping. Rather, Prince Turki al-Faisal is pushing for Saudi Arabia to ramp up its production capacity to reach as high as 15 million barrels per day, which would easily top the projected U.S. production even at its highest point.

However, the current Saudi oil minister, Ali al-Naimi, insists that the country is not realistically considering the possibility.

"I don't think anyone should fear new supplies…. The pie is getting bigger, and there is enough to go around," said Naimi, according to the Journal.

With demand rising from China and other developing economies much faster than it is falling in the West, oil prices should grow significantly in coming years, and current production levels will more than meet the country's needs.

The difficulty, however, is that Saudi Arabia faces increasing pressure from its populace to provide a growing variety of social programs, particularly in the wake of the tumult of the Arab Spring.

A serious effort to increase production, though, would likely spur a similar reaction from other countries and plunging prices as a result, as occurred at times in the 20th century, which would likely discourage policy makers from taking that course.

 


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02/29/2016 7:01am

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07/25/2016 9:50pm

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05/21/2017 4:03am

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05/31/2017 7:23pm

A price increase is just enough if the demand is starting to increase to. We are talking about global market here, and every adjustment of a certain country affects all countries as well. Saudi Arabia and America should have several proper talks about this matter as the demand of oil in various countries is becoming higher than what was expected. A talk that will solve the problem, and will be a great preparation for a demanding future.

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