Is OPEC Right Regarding US Shale Oil?

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By Jacob Maslow

Fracking Graphic Explanation
Graphic illustration of fracking

OPEC Chief Abdalla Salem El-Badri said that the collapse in global oil prices is hurting US shale oil production. He said, “Projects are being cancelled. Investments are being revised. Costs are being squeezed.” He appears to be making this assessment like it is a natural part of the natural price of oil. Well, let’s get back to reality here. The real reason why the price of oil collapsed is due to softer global demand. Global demand is still growing. However, it is not growing at such a high rate as to mop up excess global petroleum supply.

Moreover, this focus on US shale oil ignores the fact that for every oil rig decommissioned, existing oil rigs produce more oil. This is the great American oil production paradox. The more oil rigs are decommissioned or mothballed, the more petroleum the United States produces. Thanks to better technology and better productivity, expect this trend to continue.

Of course, the narrative OPEC wants the global market to absorb and live by is the whole idea that, as the global price of oil collapses, supplies begin to be strained. Eventually, the price will spike back up. To quote El-Badri, “If we don’t have more supply, there will be a shortage and the price will rise again.” This is wishful thinking. In fact, the United States is sitting on an 80-year record high surplus. Things are so bad that the United States is actually running out of space to store all that oil. Guess what. There is more oil coming.

The world is not suffering from a low supply scenario. What it is suffering from is a low demand scenario. OPEC knows this. You would think that the Secretary General of OPEC would know better. Regardless, this is purely a play at market sentiment and it is not going to move the needle much unless there is a fundamental black swan event in global oil production and/or global oil demand that would change the reality on the ground. Expect the price of oil to continue to slip.

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