OPEC Is Toast as US Wins the Energy War

By Patrick Watson, NEWSMAX

When OPEC decided last November to keep the spigots open despite lower oil prices, many of us predicted doom for U.S. shale producers. The Saudis, we thought, would use low prices to bankrupt those upstart Americans.

Some upstarts did go bankrupt, but others surprised us with their adaptability. OPEC is still falling apart as energy exporters fend for themselves. Even the strongest members look increasingly vulnerable to low oil prices.

Clue #1: Last week Saudi Arabia issued $5.3 billion in government bonds. The amount is tiny, but it was Riyadh’s first time to borrow cash since 2007. The Saudi government also liquidated $60 billion in foreign assets in the first half of 2015 and brought the proceeds home.

Clue #2: U.S. oil production is rising even though prices are falling. The latest Energy Information Administration forecast is that 2015 production will average 800,000 barrels per day more than it did in 2014 – when prices were sharply higher. They think it will sustain that level through 2016, too.

Clue #3: The Obama Administration is granting more exceptions to the petroleum export ban. Last week the Energy Department approved a plan for oil “swaps” with Mexico. While there is still fig leaf of legal compliance, the net effect is that American oil is reaching world markets.

Rig counts have plunged but production is up. Companies are writing down asset values even as they show higher profit margins. It makes no sense. How do we reconcile these clues with mass energy layoffs and falling population in the shale boom areas?

Actually, it makes perfect sense when you recognize how far production costs have fallen. Years of high oil prices incentivized the energy industry to develop new labor saving and cost-reducing technologies. Those innovations are ready now – and they’re having a huge impact.

One company executive told the London Telegraph that a well taking 30 days to drill in 2014 could now be finished in 16 days. Break-even production prices are plunging. Some projects are as profitable at today’s oil prices as they were at $95 oil a few years ago, simply because production costs are so much lower.

With plenty of oil and natural gas still in the ground, U.S. marginal production costs now act as a ceiling on the global oil price. Shale producers can – and will – raise output quickly if prices rise much above $50 per barrel. That figure will drop as efficiency increases further.

This is very bad news for Saudi Arabia as well as Russia, Venezuela, Nigeria, Iran and Algeria. None can sustain their government spending with oil below $100. They are sliding toward fiscal oblivion.

It is also bad news for U.S. energy companies who thought their future was in high-cost offshore and Arctic deposits. Some of those projects may never be cost-effective.

The winners are energy consumers – like you and me – and the tech-savvy shale oil and gas producers. Low fuel costs will help the domestic economy and keep the greenback strong.

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