In La Tribune 4 July 2019
Time and flexibility provided by American shale oil have changed the oil market: time, because between the discovery and production of a new conventional field time is counted in decade, but in weeks for shale; flexibility because if shale cash cost continuously decrease, its pumps stop quickly as soon as prices fall below break-even. The latter is on average between $45 and $50 a barrel, but with extremes from $23 to $70.
Era of energy abundance
In short, thanks to shale oil, we are once again in an era of energy abundance. It means the only strategy producers must adopt to maintain power is to limit their production. They are grouped into three poles: OPEC group, plus 10 producers led by Russia form OPEC+, and the non-OPECs. These three groups have three leaders, Saudi Arabia, Russia and the United States. Saudi Arabia and Russia hope that the period of US oil growth will be short. This is why the former has decided since 2014 to adapt (reduce) its production to leave room for the expansion of the third, the second is an independent ally of the first.
It is therefore understood that thanks to shale oil the United States is the world’s leading producer, and has migrated from a geopolitical strategy of energy independence to one of energy dominance. This new strategy is expressed in three ways.
Firstly, the trade opposition, and European natural gas consumers know something about it. The fierce struggle to supply our continent with natural gas is a twofold strategy: the security of a tube supplying Russian gas and the flexibility of an armada of LNG carriers delivering American LNG. It is important not to make any mistake between an Amazon type delivery and an Uber type delivery, the difference directly impacts gas prices to European consumers.
Secondly, the confrontation. The United States produces about half as much oil as it consumes, and armed forces are protecting their interests. Until recently, from the first Gulf War to the aircraft carriers that are currently operating in the Middle East. This is very different from an illusory metal war, no army has been engaged to protect copper, nickel or lanthanides! Words have a meaning!
Trying to dismantle the Opep cartel
A third hypothesis is the law. Perhaps it is the Shermann Act, signed in Washington 129 years ago, that will really be adapted and used to try to dismantle the OPEC cartel, in the same way that it cut off Rockefeller’s oil empire in 1911. Without any connection, Qatar has already left OPEC this year, and it is not excluded that the alliance between the Gulf and Russia within OPEC+ may be a prelude to this possible confrontation with Washington.
Within OPEC+, it is therefore important to give pledges now. In Vienna this week, OPEC members may have been consolidating future alliances by promising to cut production here and there, and giving up future market shares.
But as compliance with production quotas within producer unions is never perfect, and as US production continues to increase, it is likely that prices will gradually fall to around $45-55 per barrel.