In response to a dramatic increase in U.S. oil production, the Organization of Petroleum Exporting Countries, better known as OPEC, has decided to dump low-cost oil into the global markets in an effort to drive down the price of oil and punish U.S. oil producers.
A decision in November by OPEC to maintain its output suggested the group is willing to let crude oil prices slide to a level that would slow U.S. production.
Crude oil prices fell more than 50 percent in the last half of 2014. OPEC said the market would dictate oil prices, and marginal fields are going to set the price. By marginal fields, OPEC means those fields with the highest costs of producing a barrel of oil.
The fields with the highest producing costs are North American oilfields. OPEC’s decision to maintain market share no matter the price is unprecedented. Can their economies hold out long enough at low crude oil prices to stop the supply growth of North American producers?
Sign Up and Save
Get six months of free digital access to The Wichita Eagle
So far, OPEC countries appear willing to absorb huge losses in the hope that plummeting prices will make U.S. oil production unprofitable. OPEC hopes to regain its dominance and force the U.S. back into foreign oil dependence by squeezing out some U.S. oil production.
American oil producers are caught between the hammer of the OPEC cartel and the anvil of the American oil export ban. At the same time OPEC is dumping low-cost oil into global markets, U.S. producers are held captive to limited domestic refinery capability due to the current ban on the export of U.S. crude oil.
The light oil being produced in the U.S. is a poor match for domestic refineries that are primarily configured for heavy crude oil. The result of this mismatch widens the price differential between global oil and that received by U.S. producers, which reduces investment, jeopardizes oil production growth, reduces jobs and hurts the U.S. economy.
The U.S. has an effective potential countermove. Congress could lift the decades-old ban on exporting crude oil to keep U.S. producers in the game.
Over the past several years, our nation has left behind decades of energy scarcity and has become a worldwide leader in energy production.
Today, our nation is the No. 1 producer of oil and natural gas in the world. America’s emergence as a global energy leader has fundamentally reordered the world’s energy markets by elevating the importance of North American energy production and reducing what had been the dominant roles of OPEC and Russia.
This American energy renaissance has revitalized America’s economy, adding more than $283 billion to U.S. gross domestic product and supporting more than 2 million jobs.
OPEC’s decision to dump low-cost oil into global markets was designed to reverse these gains. Falling oil prices are causing some oil producers to re-evaluate their operations and plans. Some, unfortunately, are going to start curtailing their operations.
However, OPEC may be underestimating the entrepreneurial spirit of American producers. As oil prices drop, producers continue to innovate to reduce extraction costs.
Also, OPEC is vulnerable to its own policy. Although the International Monetary Fund found that Kuwait, Qatar and the United Arab Emirates can balance their budgets with oil at about $70 per barrel, other OPEC members need much higher prices. For example, Venezuela needs about $120 and Iran needs $136.
As oil prices continue to slide, the question is who will blink first, OPEC or U.S. oil producers? The answer could depend on Congress.
The current ban on the export of U.S. crude oil, instituted in 1973, was once an integral part of our nation’s energy strategy. In the wake of the 1973 Arab oil embargo, Congress sought to protect America from price shocks by keeping oil at home. Today, there is no longer a shortage of oil, and the restriction doesn’t make sense. The restriction is now a burdensome relic of America’s era of energy scarcity.
Lifting the oil export ban would allow U.S. oil producers to stay in the game. Even if the margins are low, revenue from new international markets would allow U.S. producers to compete for a share of the world market.
Exports would not hurt American consumers. A recent analysis by Energy Information Agency found that domestic gasoline prices are directly tied to global crude oil prices. So exports would not raise gasoline prices. More importantly, an ICF study found that if crude oil exports are allowed, the U.S. economy could gain up to 300,000 jobs in 2020.
OPEC thinks it can squash America’s oil industry. However, with the right export policies, the U.S. can win this price war and solidify its place as a global energy leader.
Edward Cross is president of the Kansas Independent Oil & Gas Association.