PETROANALYSIS || ARTICLE

There is a symbiotic US-OPEC relationship

Published on

March 4, 2019

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Petroanalysis Team

Petroanalysis Team

Recently Petroanalysis published Mike Summers’ API article on NOPEC. The following is meant to add some clarification and emphasis.

Oil prices have generally been rising this year as OPEC and Russia stick to supply cuts, despite pressure from U.S. President Donald Trump.

This is something that is perceived by public opinion as a hostile act and it worries politicians with elections on their minds. The odds were pretty good for anti-OPEC legislation given rising anti-Russian and Saudi Arabia sentiment.

But the time to see OPEC, and in particular Saudi Arabia, as an enemy has passed, says Dan K. Eberhart – punishing OPEC would be a huge mistake for the US.

The recently approved bill by the House Judiciary Committee known as NOPEC could have the unintended consequence of higher prices in the long term. And this is official, stated by Energy Secretary Rick Perry.

On February 7th this committee unanimously passed a bipartisan bill known as the No Oil Producing and Exporting Cartels Act, or NOPEC.

The legislation would change US antitrust law to revoke the sovereign immunity that has long protected OPEC members from US lawsuits. It allows the Department of Justice to sue the oil producers group or any of its members on grounds of collusion.

Versions of the bill have come up in Congress for the last 20 years. A bill passed in 2008 but President George W. Bush never signed the legislation into law.

The U.S. Energy Secretary Rick Perry said on February 28th: “We need to be really careful before we pass legislation that may have an impact that goes way past its intended consequences.”

Perry said the bill could reduce supply management by oil producers in global markets, possibly leading to a glut of oil and lower prices. That could have the unintended effect of eventually pushing many producers out of the market, which would send prices back up.

For his part, Eberhart explains apparently complex questions in a very didactic way.

For decades OPEC has been an economic bogeyman to the United States, and for much of the time since its founding in 1960 the cartel has deserved that status.

Over the past five years however, OPEC has become an integral partner in America’s energy security by regulating the supply of oil and maintaining a generally fair oil price.

The symbiotic relationship between Saudi Arabia and America has produced a remarkably balanced oil market and it has also spurred Saudi investments in other sectors of the US economy.

Saudi Arabia, Kuwait, Iraq, Iran and the United Arab Emirates, hold the lowest-cost conventional oil, reserves in the world.
The shale sector needs higher prices than the cartel’s leading producers to keep drilling.

The break-even point for shale producers is roughly between $30 and $60 a barrel on average, according to industry watchers. Production costs in some Middle Eastern countries are less than $10 a barrel.

If Saudi Arabia, with 268 billion barrels of low-cost reserves, really wanted to bring the shale sector to heel, it could. A price war would no doubt cause pain to those OPEC members with higher production costs than Saudi Arabia, but there is no doubt that Riyadh has the capability.

The price collapse in 2014 the drove companies into bankruptcy and cost American jobs, prompted by the anti-market activities of OPEC. This is perhaps a reminder of what happens when the spigots are turned on.

OPEC’s moderating role has allowed the US oil sector to achieve record oil production and has made America a major energy exporter – something that seemed impossible less than a decade ago. More often than not in recent years, the cartel has succeeded in keeping the price of oil just high enough to spur investment in new shale fields, but low enough to keep consumers happy.
Rather than competing with America, though, OPEC led by Saudi Arabia, has been holding back about 1.2 million barrels of production a day from the market, making room for US shale producers to continue to increase output.

The Saudis have effectively subsidized the US oil boom. Any legislator who cannot see that is not paying attention.
Punishing OPEC would be a mistake, no matter how popular it is with voters.

Saudi Arabia remains the world’s only real swing producer. It is capable of adding or subtracting several hundred thousand barrels a day of production in a matter of weeks. With its hands on the taps, Saudi Arabia has considerable power over oil prices, even while the United States has surpassed it as the world’s largest producer thanks to the shale boom.

It is time we realize that OPEC is no longer a bogeyman, but an ally with common interests, says Eberhart.

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