U.S. overtaking OPEC as the vital oil global swing producer that determines prices

The oil boom in the U.S.—especially in Texas and North Dakota—has swung the balance of power from Saudi Arabia to the U.S., Clifford Krauss reports for The New York Times. "Put another way, the United States is overtaking the Organization of the Petroleum Exporting Countries as the vital global swing producer that determines prices." (Denver Post photo by RJ Sangosti: A hydraulic fracturing site owned by Anadarko in Colo.)

"That remarkable change has been building since 2008, as American shale fields accounted for roughly half of the world’s oil production growth while American petroleum output nearly doubled," Krauss writes. "The demise of OPEC as the price manipulator is what virtually every American president since Richard Nixon had in mind when they promised to find a way to make the United States energy independent, not chained to Middle East or OPEC oil, after the oil embargoes of the 1960s and 1970s."

With all prices falling—from $100 a barrel in June to $45 a barrel during the winter—some leaders have suggested that OPEC cut production to strengthen prices—a move that worked during the last slump in 2009, Krauss writes. "But the Saudis and their Gulf allies said no. They argued that if they cut production, they would merely lose market share to the surging American producers who were increasing daily production by a million barrels year in and year out with no end in sight. The decision effectively forfeited the cartel’s traditional role as the global oil swing producer—the one and only supplier with the volume of production to raise and lower prices by managing the cartel’s output."

"The decision came as a shock to the oil market. From the moment OPEC decided to keep its production constant at 30 million barrels a day, a fairly gradual price retreat that began in July morphed into a nose dive as commodity traders dumped their oil positions," Krauss writes. "Many independent American producers saw the move as a direct attack on them, but it was really a throwing in the towel to the new reality of growing American oil output."

An increase in railroad traffic has made it possible for the U.S. to ship more oil from North Dakota to East Coast refineries, lessening the need for oil from the Middle East and Africa, Krauss writes. That forced OPEC producers to redirect their product to Asian markets, where competition forced them to cut prices.

"The U.S. Department of Energy has predicted that current U.S. "oil production of 9.4 million barrels a day will decline by 210,000 barrels a day in the third quarter," Krauss writes. "Energy experts expect further declines into 2016 (accompanied by reduced production in some conventional foreign oil fields), and many executives are predicting that prices will stabilize at $70 to $80 a barrel over the next few years, a sweet spot where consumers get a break but companies can still profit because technology is making drilling cheaper." (Read more)