Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is This the Biggest Threat to OPEC?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

The Organization of the Petroleum Exporting Countries, or OPEC, describes itself as "a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its Member Countries."

Historically, the organization has exerted considerable influence on the world oil market, with many even characterizing it as a cartel. Over the past three decades or so, it has produced a little less than half of the world's oil, with its Gulf State members still controlling most of the world's crude oil spare capacity. By lowering their collective output, OPEC members can push global oil prices higher, or so the logic goes.

But now, there is convincing evidence that OPEC's sway in the oil market is waning. Let's take a closer look at some of the major recent developments that may be keeping OPEC members up at night.

OPEC's glory days
In previous decades, OPEC's influence on the global oil market was almost undeniable. The surge in oil prices during 1973, for instance, can be attributed largely to OPEC actions, which included a dramatic increase in "posted prices" for their oil, as well as a wave of nationalizations among OPEC member nations and the organization's temporary embargo against the U.S. and others.

But a lot has changed since those days. Since 2008, non-OPEC oil supplies have increased dramatically, fueled by growing production from U.S. shale, Canada's oil sands, and deepwater discoveries off the coasts of Brazil, Africa and other parts of the globe.

This year, non-OPEC supplies are projected to grow by almost 1 million barrels a day, largely because of advances in drilling technologies that have allowed energy companies to extract massive quantities of oil from leading U.S. shale plays such as North Dakota's Bakken and Texas' Eagle Ford.

In the Bakken, for instance, Kodiak Oil & Gas (UNKNOWN: KOG.DL  ) roughly tripled its average production between 2011 and 2012 and is projecting to double this year's production from last year's levels. And in the Eagle Ford, Chesapeake Energy (NYSE: CHK  ) reported fourth-quarter daily net production of 62,500 barrels per day, representing a whopping 266% year-over-year increase.

Not surprisingly, North Dakota's field production of crude oil has increased more than fivefold over the past five years, going from 45.1 million in 2007 to 242.5 million barrels last year, while Texas' crude oil production has almost doubled over the same period, from 391.1 million barrels to 721.4 million.

OPEC lowers its forecast
Though senior OPEC officials initially downplayed the threat of rising North American oil supplies, it looks as though the organization has now started to seriously consider the shale boom as a major threat.

Last month, it reduced its forecast of demand for its crude oil this year by 100,000 barrels per day to 29.7 million barrels a day, citing growth in U.S. shale production as a major factor underlying the downward revision. If the new forecast turns out to be accurate, demand for OPEC crude would be 350,000 barrels a day below the 30.1 million barrel-a-day level that it was last year.

According to estimates by The Wall Street Journal based on historical data and OPEC's forecasts, the organization would supply 33.1% of expected global oil demand this year, down from 35% last year. That would represent OPEC's lowest share of the global oil market in more than a decade.

Less reliance on OPEC supplies
Already, the shale oil boom has dramatically reduced U.S. oil refiners' demand for OPEC oil, as infrastructure improvements have allowed access to growing quantities of oil produced in major domestic oil plays.

For instance, Nigeria -- OPEC's most important African member -- has seen its exports to the U.S. fall by almost half between 2011 and 2012, as refiners have substituted Nigerian light sweet crude oil with domestic supplies.

Valero (NYSE: VLO  ) recently announced that it replaced all imports of foreign light, sweet crude with domestic crude at its Gulf Coast and Memphis refineries. Similarly, Phillips 66 (NYSE: PSX  ) said its refineries expect to process 80% more domestic crude this year than it did last year.

Final thoughts
Though OPEC's influence on the world oil market certainly appears to be diminishing, there are some important caveats to consider.

For instance, though shale wells have produced copious quantities of oil and gas in their first few years, some experts argue that production from these wells will decline much faster than production from conventional wells.

According to a report by J. David Hughes of the Post Carbon Institute, shale oil wells decline so quickly, in fact, that more than 6,000 wells are required to be brought online each year just to maintain a flat level of production.  

Moreover, shale production is plagued by exorbitantly high production costs and requires sustained high oil prices to remain profitable. Hence, a combination of falling global oil demand and sharp decline rates could lead up to a sharp reduction in shale oil drilling, thereby lowering non-OPEC supply growth and allowing OPEC to reaffirm its dominance in the global oil market.

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2362341, ~/Articles/ArticleHandler.aspx, 10/1/2016 3:36:11 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 18 hours ago Sponsored by:
DOW 18,308.15 164.70 0.91%
S&P 500 2,168.27 17.14 0.80%
NASD 5,312.00 42.85 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 4:03 PM
CHK $6.27 Up +0.15 +2.45%
Chesapeake Energy CAPS Rating: ***
KOG.DL $0.00 Down +0.00 +0.00%
Kodiak Oil and Gas CAPS Rating: *****
VLO $53.00 Up +1.29 +2.49%
Valero Energy CAPS Rating: ****