Move Over OPEC and Russia, America is in the Oil-Price Driver's Seat

The sun may be setting on OPEC dominance (Source: lalabell68 via

Want to know something that you probably haven't considered, but will absolutely blow your mind?  Since 2011, two of the world's top 25 oil-exporting nations -- Libya and Sudan -- have seen production completely fall off a cliff, Export volumes from Venezuela and Mexico have been on a slow decline for a decade, and Russia and the West are in the midst of a Cold War-esque standoff over Ukraine. Yet over the last three years, the price of crude oil has not just stayed flat, it has declined. Step back and think about that for a minute. This was a market that used to go into panic mode if the king of Saudi Arabia had a bad meal, and now nearly 2 million barrels a day in production can vanish from the global market without anyone blinking an eye.

What has been the biggest factor in this change? American oil production. Since 2011, U.S. oil output has increased by nearly 3 million barrels per day and reduced the nation's dependence on the foreign markets to meet our energy needs. This production has brought an unprecedented level of stability to the global market and, even more miraculously, might actually have placed the United States in a more powerful position in the market than traditional powers such as OPEC and Russia. Let's look at why we are now in the leader position and what that means for American oil production over the next couple years.

The real price of oil
One of the biggest digs against shale production in the U.S. is that is more expensive than more traditional methods of getting at oil, which makes sense when you consider that these wells require long horizontal well lengths, large amounts of water, and massive pumping equipment to make it possible. The breakeven price for most of shale oil in the U.S. today ranges from $60 to $80 . When you combine that with production from other sources, many companies have reserve replacement costs well north of $50-$60, as shown in this chart from ConcoPhillips.

Source: ConocoPhillips Investor Presentation

Compare that to Saudi Arabia, where the lifting cost -- the total cost to physically take a barrel of oil from the well to market -- is below $5.

Those who fear this major price disparity point to the fact that OPEC's growing spare capacity and cost of production means the 12-nation coalition could simply turn on the tap, and then watch America's oil boom wilt on the vine as crude oil prices drop. This is certainly possible in theory, as Saudi Arabia and other large OPEC nations have massive oil reserves, as well as spare capacity. The major element that is missing from that idea, though, is the how much that barrel of oil needs to cost to fund the country. 

Major oil-exporting nations such as Saudi Arabia and Russia are incredibly reliant on oil royalties, taxes, and fees to fund the federal government. Saudi Arabia, for example, has rather lavish social programs and imposes marginal taxes on its citizens thanks to oil subsidies. The problem is, the true breakeven cost -- the price of a barrel of oil needed to bring it to market and balance country budgets -- is becoming extremely high for these nations. 

Country Budget Breakeven Price for Oil (USD)
Saudi Arabia $87.63 
Russia $117.80
Iraq $92.96
Iran $143.00
Libya $99.60

Source: Bloomberg.

So let's say Saudi Arabia turns on the taps to send oil prices plummeting by $20-$25 from today's Brent crude price of $110 per barrel. While profit margins in America may get squeezed and production growth may slow a bit, just about every U.S.-based driller could still generate a return on a barrel of oil. At the same time, it would make life absolutely miserable for OPEC nations and Russia. A $10 drop in the price of oil today would result in an annual contraction of the Russian economy of 1%.

As long as American oil companies can withstand oil prices lower then the rest of the world, we have a much stronger competitive position in the global market.  Also, that major dip in prices is less and less likely to happen because other oil-producing nations are more dependent on high prices than the United States.

This situation will this allow the U.S. to bring on an additional 1.6 million barrels of oil per day between now and 2020, as projected by the U.S. Energy Information Administration, it also could lead to something that we haven't done in years -- export oil.

What a Fool believes
For the next 10 years or so, America will likely be the stabilizing factor in the global oil markets because its cheap, reliable oil supply can help offset major production disruptions elsewhere, or even displace some of these more expensive oil sources. Is this a sustainable position? Probably not. According to the Energy Information Administration, after 2020 oil production in the U.S. is expected to slip again as shale output starts to decline. Also, Saudi Arabia is sitting on vast quantities of oil that will likely be in greater need 10-15 years from now than today. 

This entire shift in oil production and geopolitics has been possible thanks to critical technological developments in the industry, and one company is at the epicenter. If reshaping the oil market dynamics weren't enough, this company is positioned to make enormous profits from its must-have technology. Find out the name of the company we have adoringly labeled "OPEC's Worst Nightmare." All you need to do is simply click here and we'll let you know for free. 

Read/Post Comments (7) | Recommend This Article (10)

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.

  • Report this Comment On May 19, 2014, at 3:02 AM, nomas156 wrote:

    Great article, but if the Saudi regime is destabilized by Al Queda we are all screwed!! The Middle East is on fire already and the SA govt. is hanging on by a thread. God help us and good luck with that!

  • Report this Comment On May 19, 2014, at 7:55 AM, DrG wrote:

    Does everybody know that oil companies are refining the US oil then shipping the gasoline to other countries so gasoline prices are staying high in US? And people in US out there pitching for our friends the oil companies??

  • Report this Comment On May 19, 2014, at 8:26 AM, lm1b2 wrote:

    Then who do we have to thank for the High Gasoline prices,the oil companies,or the US government ?

  • Report this Comment On May 19, 2014, at 9:01 AM, Mark1946 wrote:

    This is NOT news...We're well aware America is in the "driver's Seat" when it come's to the price of crude oil...since Wall Street's "creation" of the "Global Market" the NYMEX corporate elite SPECULATORS via their future's market crude oil monopoly "betting game" have SET THE PRICE of crude oil for many years now. And, to keep prices at the pump high, they EXPORT the refined products overseas...Now to throw salt in the wound, and of course, to continue reaping mega-profits of the backs of the average American wage earner desperately trying to make ends meet, they have their political "kick-back" pals in Congress kicking around the idea of EXPORTING the crude also...GREED holds no bounds, and the "domestic terrorists" who run the show on Wall Street are determined to keep prices high no matter how much crude we're able to produce!

  • Report this Comment On May 19, 2014, at 2:14 PM, kennyhobo wrote:

    The question is: will Obama destroy the United States? Obama is working hard at destroying US energy production. He wants to increase electricity and gas prices to insure that the poor and middle class are destroyed. He has stopped keystone to stop jobs and inexpensive energy. Obama is the Hitler to the US.

  • Report this Comment On May 19, 2014, at 4:59 PM, girardotw wrote:

    I think it's time for the government to step in and put a lid on the price of gas. it should not go higher than $3.00 per gallon, and take oil off the commodities market. someone needs to start a company to make fuel out of garbage (something we'll never run out of), like the guy did back in the 80's. it was cleaner burning, he got better mileage, there was no damage to the engine, the biggest plus was he did it for only 25 cents a gallon. that's what we need. then gas prices will drop real fast

  • Report this Comment On May 19, 2014, at 5:05 PM, girardotw wrote:

    president Obama is not destroying the u.s. he is nothing like hitler (that was George bush). he has been trying to help. but the republican controlled house has been stopping him. they are trying to make him look bad to get a republican president

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