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The Resilience Of Shale And The Disappointment Of OPEC

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Arab Times

Why didn’t OPEC do its homework properly? Why did it listen to commentators who said shale oil will cause earthquakes and harm the environment, and that most local and state governments will not allow any shale oil developments on their lands?

Almost nine months have passed since the historic OPEC meeting when its swing producer role was abolished and its members were allowed to produce as much oil as they can in order to cause the oil prices to reduce so that US shale oil producers would be forced out of business. However, the opposite happened. Shale oil producers are still in business even though oil prices have dropped below $50 per barrel. In fact, USA oil production is at its peak with production of more than 9.5 million barrels a day, and is bound to increase further.

So where did OPEC go wrong? Despite having all kinds of information regarding energy and being in daily contact with both sides of the market – consumers and producers, it still failed to estimate the power of the shale oil producers. In fact, it even failed to know the actual cost for producing one barrel of shale oil.

How naive was OPEC to think that reducing the oil prices to below $100 per barrel will cause shale oil producers to become bankrupt and close down their operations!

Oil prices are currently below $45 per barrel and the oil market is awash with oil but there is not a single sign of any reduction in shale oil production.

Why didn’t OPEC do its homework properly? Why did it listen to commentators who said shale oil will cause earthquakes and harm the environment, and that most local and state governments will not allow any shale oil developments on their lands? Until now, OPEC has not been able to pinpoint the breakeven cost of shale oil production.

Oil producers are losing more than 50 percent of their daily income due to miscalculation and misjudgment. There are no signs indicating that oil price will stop declining further or oil production will reduce.

If the oil producing countries knew the simple economics of shale oil and its resilience to low oil prices, OPEC would not have taken the decision to allow the oil production to go out of hand. It would have instead taken other routes to bring better discipline in the oil market.

What OPEC needs is a price level that non-OPEC members cannot compete below its economical breakeven price. However, this question should have been answered during the meeting in November last year. OPEC failed to specify the number at that time due to which its members have since been suffering from loss of revenues.

It is certain that the oil prices will not stabilize in the coming months especially when Iraq and Iran are pushing more barrels of oil into the market and are striving to gain market shares by providing discounted prices.

Therefore, the struggle among the OPEC members is likely to intensify until a political or commercial compromise is reached. These days, the challenge is not about how high oil price will reach but how soon a compromise can be reached.

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