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You wait decades for an existential crisis, then two come along at once. At least that’s how it must feel for OPEC’s beleaguered ministers. In the short term the market for their oil is being eroded by rising production outside their control. Looking further ahead, oil demand itself is under threat from the electrification of road transport. OPEC may not yet be dead, but its days are surely numbered.

The most obvious short-term threat to the group comes from the rapid rise in U.S. shale oil, but the risks have expanded to include other areas like Brazil’s prolific sub-salt discoveries and more recent finds further north along the east coast of South America.

Asian Appetite
Asian buyers are turning to U.S. crudes to offset the effect of OPEC output cuts
Sources: Bloomberg, EIA
An increasing volume of U.S. crude is finding its way to markets in Asia that used to be the preserve of the group’s Middle Eastern powerhouses. China was the biggest foreign buyer of U.S. crude in April — the most recent month for which EIA data are available — overtaking Canada for the second time this year. And Indian refiners are finding an appetite for heavier U.S. grades that compete directly with Middle Eastern crudes. This is a particular worry for OPEC producers whose initial output cuts were said to target buyers in Europe and the Americas while sales to key customers in Asia were to remain untouched.

Add to this that there’s been little letup in U.S. oil production. The American surge began late last year, just as OPEC ministers were edging toward a deal to cut output after a two-year production free-for-all that saw WTI crude fall to little more than $26 a barrel. This shows little sign of running out of steam — output from the Lower 48 states, which includes offshore activity in the Gulf of Mexico, edged above 9 million barrels a day in the third week of July, its highest level for almost two years, according to weekly data from the Energy Information Administration.

Lower 48 oil production hit 9 million barrels a day for the 1st time in nearly two years
Source: EIA

The group’s short-term worry is that any rise in crude prices above $50 a barrel will simply allow competing shale companies to hedge more of their future production and unleash another surge in output. This makes it almost impossible for them to engineer the price recovery they desire.

Outside the shale patch, big oil is learning to live with lower prices again. Royal Dutch Shell Plc “is getting fit for the $40s,” Chief Executive Officer Ben van Beurden said on Thursday’s second-quarter earnings call, after the company released results showing that it generated almost as much cash from its operations last quarter with crude around $50 a barrel as it did when it was above $100. These companies may be getting fit, but the budgets of the OPEC countries certainly aren’t. They haven’t made the cuts they need to survive if prices persist at that level.

Van Beurden also articulated the second existential threat, when he said in an interview with Bloomberg TV not only that his next car would be electric, but that he could see demand for liquid fuels peaking in the 2030s.

A political trend towards growing electrification of transport poses a real, long-term problem. Nobody in their right mind is suggesting that oil is suddenly going to stop being the world’s transport fuel of choice, but its market share will come under increasing pressure. Four countries in Europe have now proposed bans on the sale of gasoline and diesel-fueled cars by 2040 at the latest. Between them they account for around a third of all the passenger vehicles in use in Europe.

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