Shale Oil's Threat to OPEC
North America's shale oil glut could shake up OPEC exports.

Once upon a time, the Organization of Petroleum Exporting Countries (OPEC) commanded worldwide respect—mixed with fear—because of the power they wielded over the world’s economy. After all, if they decided to throttle oil supply to any given country, it would precipitate a major crisis.

But with the increasing pace of the “shale oil revolution,” all that could change.

OPEC faces several problems. First there’s the developing face-off against an Iran-Iraq alliance. Then, there is the problem posed by oil-price hawks like Iran and Algeria against a weakening Saudi Arabia, which has long dominated OPEC policy.

The U.S. imported 20 percent of OPEC exports last year, or 4.5 million barrels/day. This satisfies roughly half the nation’s requirements.

Emergent technologies like hydraulic fracturing have opened up a glut of North American natural gas from shale rock. The implication is obvious—in the future, a day may come when we won’t have to rely on OPEC at all.

Reuters reports that ConocoPhillips CEO Ryan Lance told OPEC last Wednesday:

“In 1990, North American reserves and production were falling but thanks to unconventionals, proved reserves have risen 68 percent since then. North America could become self sufficient in oil as well (as gas) by 2025.”

Perplexingly, OPEC does not seem to be very concerned. Kuwaiti Oil Minister Hani Hussein reflected the characteristic complacency when he remarked:

“Oil from the Middle East will always find a home. And we have to wait to see more research to get a better idea about the impact of shale oil development.”

What’s really causing a shift in production location is where unconventional reserves appear. For example, China and Russia—both non-OPEC nations—currently boast some of the biggest unconventional reserves. However, recent price drops in the world oil price may work against unconventional oil producers.

In April, Riyadh in Saudi Arabia produced 10 million barrels/day (their highest production quota in several decades). Of course, the ongoing worldwide economic doldrums have also tamped prices down. This might slow down the advance of unconventional developments and cause Saudi Arabia to artificially depress prices.

OPEC has been around for more than fifty years, and has endured several booms in oil development. But will it really withstand the spread of shale and other unconventional oil reserves?

Shale Oil's Threat to OPEC originally appeared in Energy and Capital. Energy and Capital, a free daily newsletter, offers practical investment analysis in the new energy economy.
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