OPEC Death Watch

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A number of recent articles suggest that OPEC — that kleptocratic cartel that has artificially jacked up oil prices for so many decades — is in its death throes.

The cause is something upon which I have long commented in these pages: the roaring renaissance of the American oil and natural gas industry, a renaissance produced by entrepreneurial capitalism — as opposed to interventionist statism. While the Department of Energy funded wind and solar power, along with biomass and ethanol production, all of which together have accounted for only a tiny sliver of American energy production, and that only with massive subsidies and draconian mandates — private enterprise backed the winners: oil and natural gas.

But the recent dramatic increase in production and exportation was occasioned by Speaker Paul Ryan’s success in enacting into law the right of American energy companies to export those resources. This allows frackers (and ordinary drillers) to increase production, because they now have an unlimited world market within which to sell their products.

There's a roaring renaissance in the American oil and natural gas industry, a renaissance produced by entrepreneurial capitalism — as opposed to interventionist statism.

And this is already happening, as several noteworthy articles report. One is a Bloomberg report that of all countries, no less than the United Arab Emirates (UAE) — the fourth largest oil exporter in OPEC — is buying oil from shale wells in Texas. It turns out that the Texas crude is much “sweeter” (lighter and of superior quality) and more useful to the UAE’s refining than the local brand. The 700,000 barrels of oil that it is buying are their first purchase from us.

Bloomberg notes that while American exports to the UAE are not projected to continue, the explosion of American oil exports will. Shipments from America rose from a mere 100,000 barrels per day (BPD) five years ago to 1.53 million BPD in November of last year.

Besides increasing American exports of oil, the fracking revolution has reduced non-American imports to below 3 million BPD, the lowest level since data were first gathered 45 years ago. Our current net imports are only one-fourth of what they were in 2006, and we are likely to become a net exporter in about a decade — sooner, if ANWR is finally tapped, and new offshore areas are opened up for drilling.

The 700,000 barrels of oil that the UAE is buying are their first purchase from the US.

A second story reports the rapid growth in exports of domestically produced natural gas. It reveals that China has signed a long-term contract with Cheniere Energy — a major exporter of liquefied natural gas (LNG) — under which Cheniere will ship LNG from the Gulf Coast to China. Under this contract, Cheniere will provide 1.2 million tons of LNG annually to China, starting in five years, and lasting for 20 years after that.

And there is a third story, which notes that besides a rapid rise in American LNG shipments to China, we are seeing an explosion of exports of American crude oil shipments to that country. These exports have mushroomed from zero, before two years ago, to 400,000 barrels per day during the past two months. And again, if we bust open ANWR and the coastal waters of Alaska, such exports will increase even more quickly.

One nice side effect of this is that the more oil China buys from us, the lower our balance-of-trade deficit is with China. Two months ago our trade deficit with China was $25.55 billion. Last month it dropped to $21.895 billion.

Our current net imports are only one-fourth of what they were in 2006, and we are likely to become a net exporter in about a decade.

For the foreseeable future, of course, China will continue to buy most of its oil from Russia and the OPEC countries. But our share of the Chinese market will grow, for two reasons. First, at $60 per barrel, American crude is more than $4 cheaper than the benchmark (Brent) price. Second, while there are certain infrastructure bottlenecks that have to be overcome, they are being addressed. For example, while we don’t yet have ports capable of handling the biggest oil tankers (“Very Large Crude Carriers”), we have already started expanding one of the largest ports on the Louisiana coast.

All of this has added to the stress on OPEC that may result in its collapse as a cartel: the members of the cartel may go their own ways. The recent uptick in oil prices above the $60 per barrel range has helped OPEC find some relief. The recovery of the old price from its lows in the $40–50 range has two causes.

One is the meltdown of socialism in Venezuela, which has cut its oil production dramatically. Venezuela, a founding member of OPEC, is allocated by the Cartel to produce 1.97 million BPD. But the near civil war in Venezuela has dropped actual production to only 1.64 Million BPD. In fact, Venezuela’s production dropped by a whopping 30% last year alone. This is a steeper decline than that experienced by Russia when the Soviet Union broke up, and that experienced by Iraq following the 2003 invasion!

As noted by the Wall Street Journal article that I am referencing, the drop in Venezuelan petroleum output will likely continue, if not accelerate, because the nation is trapped in a vicious socialized spiral. As it exports less, it receives less foreign currency, which cuts its ability to buy food and other necessities that its own dysfunctional economy cannot produce, which in turn increases its hyperinflation and thus the political and economic failure. Moreover, Venezuela’s declining shipments of crude are deducted to paying creditors (such as Russia) and are in constant danger of being seized by creditors.

All of this has added to the stress on OPEC that may result in its collapse as a cartel: the members of the cartel may go their own ways.

In short, the ill winds that have so badly buffeted the hapless Venezuelan people have blown great good to the rest of OPEC. I suspect this is the real reason why Russia — no longer itself socialist — so strongly supports the Venezuelan socialist regime: it keeps a formidable competitor on the ground. The Russians want nothing so much as fair competition — the history of their Olympic teams shows that!

Speaking of Russia, the second major reason that OPEC has been able to keep the price of oil as high as it has recently (i.e., in the $60–70 per barrel range) is that so far Russia has stuck to its agreement with OPEC to hold down production. In early 2017, OPEC and Russia — which, while not a member of OPEC, is certainly an ally of it — agreed to cut back Russia’s production. This agreement has held up for thirteen months, now, and the Russians have signaled that they are inclined to keep to the bargain through the rest of this year and even into the first half of next year. However, the Russian oil oligarchs are expressing doubts about the deal — since Russia needs to maximize its income in order to arm itself maximally.

Vadim Yakovlev, deputy CEO of Gazprom Neft, the giant Russian oil company, has said that the company views the OPEC agreement as only temporary, and it irks the company to be forced to hold back production. Gazprom’s CEO Alexander Dyukov has said, “Following the OPEC agreement, instead of growing at eight to nine percent, we [Gazprom] have increased by just 4.5 to five percent. Which is, without a doubt, a negative factor for us.”

At this point, American production is a regulator of world prices: whenever the price rises much above $60, the industry jacks up production, and the result brings the price right back down.

It is clear that OPEC’s day of rule is coming to an end. America — already the greatest producer of oil and natural gas combined — is on track to become the world’s biggest oil producer this year. Energy research firm Rystad Energy estimates the US production will rise by 10%, hitting 11 million BPD. America hasn’t been the global leader since — 1975!

The report from which I have drawn that last piece of information notes that in 2015 the Saudis drove oil prices down to $26 a barrel. This lowered American production by 11%. But the American oil industry, not destroyed, became stronger — and more efficient, able to turn a profit with prices as low as $30 a barrel. While some experts are not so sanguine about the US becoming number one, it is clear that our production will continue to grow. At this point, American production is a regulator of world prices: whenever the price rises much above $60, the industry jacks up production, and the result brings the price right back down. A recent article spells this out — oil prices have been driven down by American production’s rise to a new high of 10.25 million BPD.

In sum, the days of OPEC — an evil cartel of evil states, from socialist Venezuela to religious-fascist Iran to duplicitous Saudi Arabia to revanchist neofascist Russia — are numbered. The free market will at last prevail.




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