Shifting Sands: OPEC's Oil Market in 2014

There are even more pressing concerns than just the U.S. pursuing its own development of shale oil.

Jan 28, 2014 at 11:38AM

The United States is poised to be the world's largest oil producer by 2015, says the IEA. Yet, with the U.S. swiftly moving from oil importing to exporting for the first time in forty years, the oil markets have rarely been more volatile. With anticipated advances in shale oil extraction, classic oil producers seem to be confused as to what this radical shift in energy consumption might mean. Unfortunately, there are even more pressing concerns than just the U.S. pursuing its own development of shale oil. 

Iraq and Libya
OPEC continues to commit to a benchmark of 30 million barrels per day, even as many institutional concerns in the Middle East and Africa continue or worsen. Iraq is still a hotbed of sectarian violence, and Libya's lackluster oil extraction and refining capabilities threaten to undermine previously set quotas. In the case of the former, solutions seem highly unlikely given the ethnic divide between Iraqi Kurdistan and central government officials.

Libya's situation, though less ethnically driven, is perhaps more dire due to the highly political nature of current conflicts. Current efforts to return oil production and distribution facilities to the central government continue to go unresolved as militias formed in the wake of the 2011 civil war control all major ports in Cyrenaica. Given the existence of additional conflicts between the government and tribal communities, this has caused Libyan oil production to slide deleteriously to half of its 2012 production levels (1.37 mmb/d).

This failure to meet quota is understandable, considering the rash of political turnover that has occurred in the area over the past several years. What this creates is an extremely fluid market in which many other oil producers (including other OPEC member states) move to snap up as much of the available market as possible.

A feeding frenzy
Normally, this may have been more controlled, but a feeding frenzy has erupted in the wake of the possible detente between the West and Iran. Iran, seeking to make up for lost revenues under sanctions, pushes for increased production levels at the cost of a diminished price per barrel. Such signalling will cause increased tension between Iran and its fellow OPEC members, many of which will be forced to restrict production if Iran receives this consideration. Given Iranian calls to scale up oil production from 2.5 mmb/d to 4 mmb/d, further strain will likely be created with Saudi Arabia as its oil primacy is eroded. 

OPEC is further threatened by oil producing nations outside of the organization. While oil productivity in these states may not approach OPEC's collective oil capabilities, the addition of regional oil producers such as Russia, China, and Canada continue to weigh heavily on OPEC internal decisions. As one former U.S. State Department official notes, OPEC risks "significant erosion of market share and non-OPEC production rises." Despite this additional concern, there is a spark of hope for OPEC in the coming year. Shale oil production is a new technology and still relatively costly versus classic oil production techniques. This in turn causes shale producers to pursue a minimum price level of 80 USD/b.

Bottom line
Should OPEC manage to control its internal issues and disputes, this costly shale oil could be a godsend. The only question is whether or not to pursue a course that induces a drop in oil prices (and drive shale oil out of the sort term) or give in and lose market share to other production avenues. Neither solution is ideal but with economists noting a $90 per barrel price as too high, OPEC needs to prepare for a market future where oil prices continue to slip from 2012 peaks. 

The face of the oil market is changing rapidly in the face of new technology. OPEC needs to act to retain its place or be slowly relegated to a far less influential position.

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