Apr 27, 2015 6 min read

For years, the lords of oil sealed in faraway deserts could swing oil markets with a few words, by ordering their state-owned oil companies to loosen or tighten production spigots.

As oil prices fell last year, though, the Organization of the Petroleum Exporting Countries, dominated by Saudi Arabia, departed for the first time in decades from its usual strategy of cutting production to bolster prices for the rest of the world.

Now, according to an oft-repeated theory at last week’s IHS Energy CERAWeek conference in Houston, the center of gravity of the global oil market may be shifting toward scores of U.S. oil firms and the financiers bankrolling a domestic shale energy surge.

That doesn’t mean U.S. players can get the price of a barrel back to $100 from $50 as they might wish. OPEC can’t either, while the world’s oil output is a million barrels a day over demand. But the technological breakthroughs that have opened up U.S. production from dense shale rock mean that many producers from Texas to North Dakota can drill and pump oil so fast that they at least can exploit any price rally – even if the added supply quickly pulls prices back down.

That’s why traders around the world are watching rig counts and other data for signs U.S. production may fall and lift prices for the black gold.

The situation benefits consumers with lower gasoline prices on the down cycle but increases uncertainty among workers in Houston and other places with economies linked to oil.

The quick-response shale production, according to some CERAWeek talk, makes the United States the world’s “swing producer” – a dominant player that at least in theory can move markets single-handedly.

Flaw in the theory

But the theory has a flaw: U.S. producers operate in a competitive market, not a monarchy.

“A swing producer is someone who can act, and act independently,” University of Houston energy economist Ed Hirs said.

Hirs says he doesn’t buy the idea that Saudi Arabia has lost some intangible aspect of its market power. It had little choice last November because it could ill afford to let production and revenue losses play into the hands of its foes in the Middle East.

OPEC can adjust output quickly. A small group of oil ministers can tell state companies how much to produce. Saudi Arabia also has cash in its treasury, produces oil for less than $10 a barrel and can afford to ride out a slump. Some other OPEC members would prefer to sell their oil for more, aided by Saudi cutbacks, but Saudi Arabia remains OPEC’s oil king.

U.S. production, by contrast, is full of players motivated by profit, who make their own decisions about whether to drill new wells, produce from existing ones or do neither.

IHS analysts acknowledged this point in a CERAWeek wrapup on Friday, noting the distinction between OPEC and U.S. producers.

“It’s not as if one minister or ministers gets together and says produce more tomorrow and release these inventories,” said Jim Burkhard, head of oil market research at IHS. “This will be much more complicated and messy calculus.”

But doubtless, the United States oil patch is gaining power in global markets that would have been impossible before the shale boom.

In U.S. oil fields, a dollar spent in 2016 will bring up about 45 percent more petroleum than it did last year, IHS analysts estimated, because discounts on equipment will make drilling cheaper and a migration to the most reliably prolific shale will mean fewer unproductive wells.

More resiliency

Even if U.S. producers don’t add much more to their spending budgets in 2016, they can grow production by roughly 500,000 barrels a day. So, even though signs point to a slide in U.S. production growth this year, output could begin rising again by the end of this year or in the first three months of next year, the analysts estimate.

“We’ve seen over the last few years this tremendous potential for efficiency gains,” said Christof Rühl, global head of research for the Abu Dhabi Investment Authority, a sovereign wealth fund in the United Arab Emirates. “I think we should expect more resilience from North American shale.”

In the 1980s, Saudi Arabia let its daily crude production slip from 10 million barrels at the start of the decade to just 2.3 million in 1986, in an unsuccessful effort to reverse a price decline that decimated the Texas economy and the global oil industry that decade. Instead of girding up prices, the Saudi’s watched rivals within and out of OPEC steal its customers.

When the cartel met last Nov. 27, the price of international benchmark Brent crude oil had fallen from a 2014 high just above $115 a barrel in late June to $77.75. U.S. benchmark West Texas Intermediate had taken a similar fall during the same time frame, from $107 to $73.69.

Yet among OPEC’s 12 members, all but a few of Saudi Arabia’s close allies in the Persian Gulf were balking at shutting in prized wells to boost prices. The Saudis ran out of patience and kept the oil flowing.

And there are no signs OPEC will change its stance at its meeting in June, said Bhushan Bahree, a global oil markets researcher and advisor at IHS.

Yet, with the advent of hard-charging shale oil production, something has changed. If OPEC were to cut production by, say, 1 million barrels a day, it would send prices higher, but shale producers could add that amount of oil back into the market in a year to 18 months, said Roger Diwan, vice president of financial services at IHS, in an interview with the Houston Chronicle.

And producers may only get encouragement from Wall Street investors, who currently have money in abundance, especially compared with two other oil busts of the past 20 years, both driven by global financial crises.

Investors bullish

Financial markets seem to have decided oil will rise again, and they fear missing the upside of a recovery more than making a bad investment. Investors have spent $6 billion pouring U.S. oil into storage tanks, kept oil-company stock prices from falling as far as oil and have given producers $12 billion in capital to stay afloat.

Complicating the situation, oil companies effectively are storing crude underground by drilling thousands of wells but not completing them for production. They can turn those wells on quickly – giving producers more of the quick output ability that the Saudis have had for years, said Amy Myers Jaffe, executive director for energy and sustainability at the University of California at Davis.

That gives the U.S. producers more control, but unlike the Saudis, they decide individually whether to bring on crude production. And if they do, a word from the kingdom still might be enough to send prices up or down. XXX – End of Story