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

The United States has greater control over the global price of oil than ever before.

May 18, 2014 at 11:38AM

Oil

The sun may be setting on OPEC dominance (Source: lalabell68 via pixabay.com).

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.

Reserve Replacement Costs

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. 

You can follow Tyler at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter,@TylerCroweFool.

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