OPEC’s gamble“What we heard was the thunderous collapse of a fortress of an energy cartel that oil-producing Gulf nations have been defending for the last 50 years,” observed Kim Hee-jip, an energy specialist and the former managing director of Accenture Korea. He was referring to what he called the “most important decision in 30 years” by the Organization of Petroleum Exporting Countries (OPEC) to maintain production at current levels, rolling out its 30 million barrels a day to create a supply glut and send oil prices down even further at the expense of profitability. Saudi Arabia, the largest producing member, argued against a cut in crude output to fight for OPEC’s market share, which is threatened by the U.S. shale oil boom. The decision sent the price of West Texas Intermediate light U.S. crude to a new four-year low of below $70 per barrel, more than 40 percent down from $107 in June.
Industry watchers said the Saudis were aiming directly at the U.S. shale industry, and that the global crude market is now engaged in a big game of chicken. OPEC has raised the stakes in the hope that U.S. producers will throw up the white flag and cut back their production if oil prices near the break-even point for the U.S. fracking industry, which is estimated at around $50 or $55. Saudi has won before by playing hardball. Saudi increased output despite an oil glut in 1985 and pushed oil prices from $31 per barrel to $10 in 1985 to defeat other members and oil-producing countries in northern Europe.
But the playing field is different this time. Saudi Arabia may be in for a major money-losing gamble. The United States has become as big an energy exporter as Saudi Arabia thanks to the shale gas boom. The landscape reshaped by the entry of the fracking industry in North America, which extracts oil and natural gas out of shale, is entirely different from when it was entirely run by state energy companies or major multinationals. Hundreds of companies are now in the game. If Saudi Arabia pushes the prices down, many marginal players will have to cut production or even close businesses for sure. But only about 5 percent of the shale industry players produce at $70 or more per barrel. Many are now able to produce much more efficiently due to technological advances and companies in the shale hotbed in North Dakota and Montana have brought down the breakeven points to $35 to $40.
Along with cheaper gasoline prices, the U.S. shale boom helped to restore free market principles in the gas and crude markets that had been surrendered to the cartel of oil producers. Oil prices won’t likely spike even if the Saudis end up crushing the shale players. The age when Gulf oil producers calibrated oil prices through control of supply may be coming to an end. The signs were already there. Despite major instabilities in the Middle East, oil prices did not jump. New supply provided a cushion.
The oil wars may go on for some time. The pain could be heavy or even fatal for oil producers like Russia, Iran and Venezuela. Those countries may not be able to sustain their regimes if their economies wobble seriously. Even the power of Russia’s Vladimir Putin could be at risk. For U.S. policymakers, many headaches on the foreign front may be resolved without any blood being spilled. Low oil prices actually can do more good than harm for the U.S. economy. Refineries and the alternative energy industry could be hurt. But overall, companies and consumers alike will be able to afford to spend more due to saving on heating oil and gas for their cars. The United States can bring oil import-reliant allies like South Korea and Japan closer and even make China, an energy black hole, grateful.
The problem is how well the U.S. shale industry withstands the price attack by the Saudi-led OPEC. The shale industry could prove to be another dot-com bust in the United States. There are many small players who have jumped onto the shale bandwagon and expanded business on short-term loans. They cannot win a game of chicken with global majors and OPEC state enterprises. But the shale industry is led not by the U.S. government but by commercial companies. Their responses could be highly flexible according to market trends.
The shale boom is called as a revolutionary turning point for the U.S. economy. The economy was helped on the one hand by the stimulus of unprecedented monetary easing and, on the other, the shale boom. The U.S. industrial map was changed with the biggest and busiest port shifting from New York to Houston, the hub of the petrochemical industry. Low oil prices are a boon for the Korean economy too. Korea spends 190 trillion won ($170.846 billion) , tantamount to half its fiscal budget, every year to import fuel resources. When international oil prices fall 10 percent, our gross domestic product can gain 0.27 percentage points. Consumption also improves. If the economy grows more than 4 percent next year, much will be owed to cheaper oil prices. Global oil prices actually do more for an economy than low interest rates and increased fiscal spending.
JoongAng Ilbo, Dec. 1, Page 30
The author is a senior editorial writer of the JoongAng Ilbo.
by Lee Chul-ho