Oil has always been a controversial commodity known to trigger tension among world powers. Oil prices fluctuate in response to changes in the forces of supply and demand. Whenever there is an increase in supply, i.e., more oil is produced, prices tend to drop on demand falling or remaining constant. Likewise, whenever oil majors cut production as demand increases or remains constant, oil prices tend to increase.
At the center of the fierce battle for dominance in there are two forces: the US backed by its shale production and the cartel of the biggest oil-producing countries under the umbrella of the Organization of the Petroleum Exporting Countries – the OPEC.
Oil production dominance wars
The US was the biggest oil producer in the 20th century, an edge that saw it manipulate oil prices through production. As the century came to a close, OPEC took over the reins as the biggest producer on US production, dropping.
Fast forward, shale oil has once again strengthened the US influence on oil prices on increased production. Being the biggest consumer of oil, any development in the US is always sure to influence oil prices.
The US factor
Whenever the US ramps production, it essentially alters the supply factor in the oil markets. Adding to the amount of oil produced by OPEC, the net effect is usually an oversupply that negatively affects prices.
Heading into 2014, US shale production increased to alarming levels. The outcome was an oversupply that resulted in oil prices crashing from above the $100 a barrel level to record lows of $27 a barrel in 2016.
Likewise, whenever US production is low, the country is forced to import more oil. The increased demand from the US and other countries often triggers a spike in oil prices.
The OPEC factor
Made up of 13 nations, OPEC came into being to regulate oil prices via production. It controls prices via the pricing-over-volume mechanism. The fall of the Soviet Union helped strengthen the organization’s grasp of the lucrative business.
In recent years, OPEC structure and power in the oil business have been strengthened by including ten other oil-exporting nations. The organization now includes the likes of Russia and Kazakhstan, providing it the much-needed ammunition to counter the US threat in influencing oil prices.
As it stands, the actions taken by OPEC+ affect oil prices immensely. The lack of an alternative body to counter its actions on production leaves it in a prime position to have a huge say on prevailing oil prices.
Oil production costs among most OPEC members are some of the lowest in the world. Likewise, member countries can produce as much oil as possible and still be profitable as long as prices are above $50 a barrel level.
OPEC’s dominant position has allowed it to have a wide-ranging influence on oil prices. Given the low cost of production, the cartel can alter production as it wishes in a bid to fuel the desired price point per barrel in the oil market.
Similarly, whenever there is an oil oversupply, OPEC is known to impose strict production cuts that in most cases drive supply lower, conversely driving prices higher. Whenever there is less cheap oil in the market, the organization increases production limits.
However, it has not been easy for the body in its mandate of controlling oil prices through production curbs. Wrangles between oil majors – the likes of Russia and Saudi Arabia – have always capitulated, sending the oil markets into a frenzy.
In the aftermath of the COVID-19 pandemic, Saudi Arabia and Russia were entangled in a fierce price war. Saudi Arabia refused to cut production even as oil prices tanked to record lows. Disagreements between members have always been much to the smaller players’ disadvantage that often pays the hefty price.
For how long OPEC monopoly of the oil business will continue is an open discussion. Technology advancement is once again fuelling the shale oil boom in North America, all but strengthening the US role in dictating oil prices given the increased production.
America rose to become the biggest oil producer in 2019 with over 19.5 million barrels a day. The high production costs involved in getting the US oil off the ground might as well explain why Saudi Arabia and Russia oil still account for the biggest share of oil exports on the global scene.
OPEC oil accounts for more than 50% of the total oil that is traded internationally. For this reason, OPEC members have a big influence on oil prices. The edge is mostly supported because OPEC oil is relatively cheap compared to US Shale oil, thus always in high demand.
However, OPEC’s monopoly of the oil business is at risk more than ever. China, one of the world’s biggest consumers of black gold, has also started ramping up shale drilling operations as it seeks to reduce its reliance on foreign oil. Argentina, Australia, Algeria, and Poland are other countries that are also ramping up shale operations.
OPEC still has the edge over the US when it comes to influencing oil prices. The low production costs involved in getting oil off the ground in most OPEC nations affirm the strong demand for it compared to the US oil.
The organization’s production regulation has proved to be highly effective, helping propel oil prices above the $50 a barrel level. However, the US ramping up shale production to capture more profits from the lucrative business threatens to affect supply levels, something that could make it extremely difficult for OPEC to control prices.
Similarly, as the US ramps shale production, oil imports should drop significantly. The net effect could be a glut in supply on OPEC failing to cut output, something that could continue holding prices below the $100 barrel level.