by Jon Sanders
Research Editor and Senior Fellow, Regulatory Studies, John Locke Foundation
Not too long ago OPEC tried to price American shale oil out of business. The cartel, which normally keeps supplies artificially low to boost prices and profits, thought it possible to flood the market and price American shale out of business. It didn’t work.
Now OPEC is stuck. They can’t undercut American shale without harming themselves too much, too. And the more they limit supply, the better the market gets for their American competitors. Earlier this year they were reduced to begging American oil producers not to produce so much. Yes, begging.
ZeroHedge discusses their dilemma in “OPEC’s impossible task“:
OPEC is on the verge of extending its production cuts for an additional nine months, pushing the deal through the end of 2018. But the determination to keep the cuts in place comes at the same time that U.S. shale seems to be accelerating in response to higher oil prices.
It’s an impossible tension that OPEC has to deal with. Hesitate on cuts and risk another slide in oil prices, or keep the cuts in place and offer more room to U.S. shale?
OPEC has tried to send a signal to the oil market that the group is operating with a consensus, and it telegraphed its intentions ahead of time to inspire confidence in the group’s cohesion. By demonstrating such resolve, the logic seems to be, the oil market would continue to tighten and prices would remain stable.
But the downside of such a strategy is that it isn’t just oil traders who are confident in a more balanced oil market – U.S. shale has kicked drilling into a higher gear recently, and appears poised to continue to ratchet up production. The rig count has climbed for several consecutive weeks, and U.S. oil production is on the brink of hitting an all-time record high.