OPEC ministers put on a brave face when pressed about one of a number of growing threats to the cartel’s influence over world crude oil markets – surging shale oil production in the United States.
At OPEC’s home base in Vienna last week, Saudi Arabia’s powerful oil minister, Ali al-Naimi, played down the impact of the light, sweet crude that is gushing in record volumes from beneath North Dakota’s bald prairie and the scrubby landscape of South Texas.
“This is not the first time new sources of oil are discovered, don’t forget history,” he said. “There was oil from the North Sea and Brazil, so why is there so much talk about shale oil now?”
Secretary-general Abdalla El-Badri was even more blunt: “OPEC will be around after shale oil finishes.”
Despite the bluster from the biggest names in the 12-nation group that supplies a third of the world’s oil, however, it is clear the Organization of Petroleum Exporting Countries is getting nervous, and experts are questioning how long the cartel can act together to hold sway over global oil prices.
At the meeting, where the group kept its production ceiling of 30 million barrels a day, it also took the revealing step of forming a committee to study the impact of the hydraulic fracturing and horizontal drilling. The technology is propelling North America toward energy self-sufficiency and may spread to other countries with their own shale oil prospects.
“It is a great concern for us, even if we do respect the integrity of the U.S. to be self-sustainable in terms of oil and gas,” said Nigerian Oil Minister of Petroleum Resources Diezani Alison-Madueke, whose country is among the most affected in terms of the loss of exports to the United States.
More than 50 years after it was created to wrest economic power from the major oil companies, the OPEC oil cartel finds itself at risk of losing its dominant role in the global oil market. The group is increasingly competing with new oil sources that are starting to chip away at its share in previously secure markets, while a shaky global economy keeps demand for oil at bay. Also troubling for OPEC as it looks to protect oil prices: One key member, long-suffering Iraq, is aiming to dramatically increase production and flex its muscles again as a major exporter.
It adds up to a nightmare scenario for the group. China, Russia and other countries are taking early steps to emulate the North American unconventional oil boom of recent years, which has the U.S. on track to overtake Saudi Arabia as the world’s largest oil producer. Some key OPEC members, meanwhile, are eager to pump as much as possible to bring in badly needed revenue, rather than restrain output as part of any concerted effort to add upward pressure to prices.
The risk is that such a scenario leads to cutthroat competition and a flood of oil in global markets, triggering a plunge in prices that could threaten the economic and political stability of its member nations.
“There’s a storm brewing on the horizon,” said Greg Priddy, an analyst with Eurasia Group, a Washington-based political risk firm, “You are looking a year or two out before it becomes acute. But that is the direction we are headed.”
How Saudi Arabia and the rest of the fractious group cope with its external and internal threats will have ripple effects around the globe, from consumers ever sensitive to pump prices, to China’s fast-growing industries, to Alberta’s high-cost oil sands producers that need rich enough prices to justify new investment in their own vast reserves.
The coming ‘supply shock’
There is no question that OPEC still holds sway in the market. Traders from Singapore to New York to Calgary hang on every word its ministers utter as they enter and exit closed-door meetings, to gauge potential impacts on prices. The group’s firm hand on its oil taps in the face of growing supplies from non-OPEC countries continues to influence international prices, which have remained around its $100 (U.S.) a barrel target.
Still, OPEC’s world is changing.
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