New Swing Producer | Russell T. Rudy Energy LLC
In a recent article in “Rigzone”, author John Kemp cites two recent developments supporting his contention that the shale revolution has transformed global oil markets. His first example is the U. S. Congress considering legislation to repeal the 1973 crude oil export ban. However, his primary focus is on the emergence of domestic shale operators as ‘swing producers’.
The article provides a synopsis of the history of the international oil industry. The U. S. has always been a major producer, and until 1952 accounted for more than half the world’s crude output. However, by 1970 we were producing only 20% of the world’s oil. While the U. S. still had significant reserves, massive discoveries in the Middle East and Latin America were pricing domestic crude out of the world market. As a result of low prices, domestic operators did not invest in replacing depleting reserves here at home. Low prices also stimulated an enormous increase in demand.
By 1972 demand was exceeding supply and OPEC realized its opportunity to dictate prices. When the U. S. supported Israel in the Yom Kippur War in 1973, OPEC made their pricing power clear through the Arab Oil Embargo. This in turn led to Congress passing the crude oil export ban in an effort to keep our resources here at home. Nevertheless, we became increasingly dependent on foreign crude.
However, by 2005 reduced domestic petroleum demand and the shale revolution have enabled the U. S. to cut imports from 12.5 million barrels of oil per day to 5 million in 2014. Kemp observes that “There has never been a shortage of oil (either in the United States or globally) at any point in the past 150 years-it’s just a question of price, investment and technology.” In the 1950’s low cost foreign oil squeezed out domestic producers. Now U. S. operators have turned the tables as a result of the shale revolution.
Kemp draws three conclusions from the history of international oil markets:
-Attempts to control oil markets in the name of ‘national security’ have never worked. The U. S. is most secure when its domestic oil industry is strong. Consequently, we should repeal the crude oil export ban to enable our producers to get the best prices available and maximize production.
-OPEC has only intermittently been able to move the global market. For the most part, the market has been driven by forces beyond its control (e.g. big discoveries in Alaska and the North Sea, rapid economic growth in China, and the shale revolution).
-Rumors of OPEC’s demise are premature. In spite of the shale revolution, we only produce about 10% of the world’s supply and are still dependent on foreign crude.
“The U. S. oil industry has become the marginal supplier of crude to the global market and is driving prices. But its market share is still just one-quarter of the crude and condensates produced by OPEC members.”
To read the article in its entirety, please go to http://www.rigzone.com/news/article.asp?a_id=138874 .
