Freefall in oil price

Clifford Krauss has an article in The New York Times about falling oil prices:

Since the economically crippling oil embargo of 1973, every American President has pledged to seek and achieve energy independence.
That elusive goal may finally have arrived, at least for the foreseeable future, with the failure of Saudi Arabia and its eleven oil cartel partners in the Organization of the Petroleum Exporting Countries (OPEC) to agree to a production cut that would put a brake on plummeting crude prices.
On Friday, the benchmark American price for crude oil continued the free fall that began on Thursday, closing at $66.15, its lowest price in more than four years.
The inability or unwillingness of OPEC to act showed that the cartel was no longer the dominating producer whose decisions determine global supplies and prices. Suddenly, the United States— which is poised to surpass Saudi Arabia as the world’s top producer, possibly in a matter of months— is in that position, although the resiliency of that new command must still be tested.
“This is a historic turning point,” said Daniel Yergin, a energy historian. “The defining force now in world oil today is the growth of US production. The outcome of the OPEC meeting is a clear indication that the oil exporters now recognize that this is a new market.”
For decades, the United States faced dwindling domestic production and rising demand, leading President George W. Bush to call on the country to get off its “addiction” to imported oil. But around eight years ago, a few small oil companies began experimenting to produce oil from hard shale rocks in North Dakota and Texas, using hydraulic fracturing— fracking— and horizontal drilling techniques that proved effective in producing natural gas a few years earlier.
Domestic oil production has soared more than seventy percent over the last six years, to roughly nine million barrels a day. The country is still a net importer but, with production growing by more than a million barrels a day every year, it is importing less and less almost every month.
Imports from OPEC producers have been cut by more than a half in recent years, forcing increasing competition among Saudi Arabia and other exporting countries seeking to replace the American market with Chinese and other Asian markets. That has produced more cracks in an organization in which competition between Saudi Arabia and Iran is already fierce.
That remarkable global turnaround has been a windfall for the United States, helping keep inflation in check, lower the trade deficit, strengthen the American dollar, and bring relief to consumers.
Recently Americans paid an average of $2.79 a gallon for regular gasoline, according to the AAA motor club, nearly fifty cents less than a year ago.
For David Goldwyn, the State Department’s coordinator for international energy affairs in the first Obama administration, OPEC’s decision not to cut was “strategic. What we have now is a yearlong game of chicken,” he said. “The Saudis are waiting to see how much US production adjusts because of prices and they are waiting to see how much pain the other major oil producers can take before they are willing to make meaningful cuts.” Referring to the global oil benchmark, he added, “If Brent sinks below $60, I think you will see OPEC hit the panic button pretty fast.” That would mean an extraordinary OPEC meeting, and emergency cuts in production.
The Brent price has fallen more than a third since June of 2014 and closed Friday at $70.15 a barrel.
For OPEC producers like Venezuela and Iran, the tumbling price in oil has produced economic hardship and potential political problems. Venezuela and Algeria contend that OPEC needed to band to together to cut production and raise prices. But Saudi Arabia has by far the most sway in OPEC, since the kingdom produces roughly one-third of OPEC output alone. It also has the financial muscle and spare capacity to lower or raise production whenever the Saudi royal family deems necessary. Saudi Arabia resisted calls for lower production mainly because the countries that were most vociferous in calling for cuts would be the countries least able to actually cut their production, since their cash-short governments are dependent on more, not less oil revenue.
And there was no guarantee that a cut in OPEC production would raise prices. Even if it did, that would only encourage more American output. So far, United States oil production has proved resilient no matter the price.
Even as prices slid in October of 2014, production in the Bakken shale field in North Dakota and the Eagle Ford field in Texas— the two primary promoters of the American oil production boom— increased more than three percent over the month before.
That is because American producers keep improving the efficiency and output of their wells with new technology (photo), and because, in the short run, lower prices can actually encourage companies to produce more to pay debts and dividends.
Energy experts caution that there is no guarantee that the United States will permanently keep its new powerful edge on world markets. Eventually, low oil prices will drive down production in higher-cost fields, drive marginal companies that are deeply in debt out of business and encourage major companies to slow down their investment in new wells. Several companies have already shaved their 2015 exploration budgets.
And OPEC has been weakened before, only to stage a comeback. The cartel is still able to produce about a third of the global oil market. After the oil price spikes of the 1970s, the United States and other industrialized countries raised their strategic reserves, put into effect conservation policies and incentivized oil production. New output from places like Alaska and the North Sea in the 1980s helped produce a glut, sending oil prices plummeting. Saudi Arabia lobbied its OPEC partners for production quota cuts, and the kingdom cut its own production. When other OPEC members failed to comply with the new quotas, prices collapsed in 1986, and Saudi Arabia lost valuable markets for years.
OPEC has never completely regained the power it once had but, in the early 2000s, oil prices spiked again primarily because of the rapid growth in demand from China and other developing countries and increasing unrest in several oil-producing countries like Nigeria and Venezuela. With the oil market growing tighter, Saudi Arabia expanded its spare capacity and kept a lid on spiraling prices.
An equilibrium price of around a hundred dollars a barrel kept producing and consuming countries reasonably happy. But now the United States production, combined with slowing economic activity in China and Europe, have broken the balance.
“OPEC still has power, in that they can still cut production and raise price if they choose to do so,” said Michael C. Lynch, president of Strategic Energy and Economic Research and sometime adviser to OPEC. But, he added: “They don’t have the same power they once did, because so many of the members are in bad financial condition, so it’s harder for them to cut production and lose revenues in the short term to raise prices.”

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