OPEC’s bet against shale: Trillions of dollars in lost revenue

A recent report suggested that OPEC’s strategy of defending market share against US shale oil production has cost it trillions of dollars in lost revenue. OPEC’s strategy may finally be paying off, as US shale oil production appears to be stabilizing.

The report issued by the American Oil Price website considered that OPEC’s patience and perseverance could lead to it regaining its dominance over the market if US oil production declines. “Defensive Strategy Since 2008, the shale boom has increased US oil production by about 9 million barrels per day.”

“In the early days of the shale boom, when it was not clear whether this development would have a significant impact, it was largely ignored by OPEC.” By late 2014, with US oil production growth approaching 5 million barrels per day, OPEC decided it could no longer ignore it.

At its meeting in November 2014, OPEC announced that it would defend the market share that had been lost due to rising production from outside OPEC, especially from the United States. “It was a shift in strategy in what she mistakenly called OPEC’s trillion-dollar estimates at the time.

High cost: The stated belief of some OPEC members at the time was that this would lead to lower oil prices, which would put a lot of marginal shale producers out of business. Instead, oil prices fell, and some shale producers exited the market, but the strategy has already cost OPEC at least $1 trillion in lost revenue with most major shale producers holding out, according to the report.

In late 2016, the group waved the white flag, abandoning this strategy and returning to cutting production to boost prices. This strategy continues to this day.” Since 2016, US production has increased by another 4 million barrels per day, forcing OPEC to remain in production cutting mode in order to defend prices.

At its last meeting, OPEC extended production cuts into next year, but announced plans to start easing the cuts starting in October 2024. Whether they continue to do so will obviously depend on the dynamics of supply and demand at that time. However, there may finally be reason for optimism within the group. OPEC’s current strategy appears to be to keep production at a level that can support oil prices in a range between $80 and $100 per barrel.

This becomes a challenge if US production continues to grow, which has been the case for the past 15 years. But if they can hold out until US shale oil production peaks and then begins to decline, OPEC’s strategy may finally pay off. US production is 700,000 barrels per day higher than it was a year ago this month. However, production has been stabilizing since late last summer. In August 2023, the United States produced 13.0 million barrels per day of crude oil. This gradually rose to 13.3 million bpd by the end of 2023 but has since fallen to 13.1 million bpd. OPEC dominance: Unless there is an increase in production over the next two months, by August, the United States will achieve flat oil production growth on an annual basis. This has happened only twice in the past 15 years. The first time was during the 2015-2016 OPEC price war, and the second was during the COVID-19 pandemic in 2020.

If US production stabilizes, it will be the first time since the start of the shale oil boom. While OPEC is certainly monitoring these developments. If US production continues to decline or even decline, OPEC’s strategy may start to pay off.

As global demand for oil continues to grow, OPEC may be able to begin easing production quotas while keeping prices high, knowing that OPEC countries possess 70% of the world’s proven oil reserves.

Russia owns another 6%, while the United States owns only 4%. Therefore, the United States and the rest of the world will suffer an economic loss in the long term if the production of non-OPEC countries declines and OPEC regains its dominance over the market.