OPEC Declares War on US Shale

According to experts, OPEC is attempting to cripple US domestic oil production by flooding the world market with oil, thus driving the price of oil below the cost of drilling by US and Canadian oil companies. Russian oil tycoon Leonid Fedun claims that the recent ramp-up in OPEC member nation oil production is a concerted effort designed to hurt the profitability of North American oil companies.

“In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun, who’s made a fortune of more than $4 billion in the oil business, according to data compiled by Bloomberg. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”

Oil futures in New York plunged as much as 3.8 percent to $70.87 a barrel today, the lowest since August 2010.

At the moment, some U.S. producers are surviving because they managed to hedge the prices they get for their oil at about $90 a barrel, Fedun said. When those arrangements expire, life will become much more difficult, he said.

Of course what Fedun says is true of any boom – strong, smart players survive while the majority of players attempting to cash in on the boom will eventually go bankrupt.

But it is very interesting that OPEC finds US domestic oil production to be this serious of a threat. Notice that solar and wind “alternatives” remain far out of the OPEC target area, mostly because their inefficiency and expense renders them no serious financial threat to fossil fuels.

The largest area of domestic energy production growth in North America is of course the huge shale oil deposits in the United States and Canada. The development of hydraulic fracturing technology in the late 1990’s made oil recovery from these formations economically feasible, resulting in a drilling boom and one of the few sectors of the US economy to continually experience strong growth. In fact, one of the few economic sectors with an ever-increasing employment base has been domestic fossil fuel production.

Will OPEC be able to force the shutdown or scale-back of North America’s domestic fossil fuel production? It would be hard to believe that the major petroleum companies would not have a contingency plan for dealing with an attempt by OPEC to drive down prices. We should be grateful that the majors have enjoyed many years of healthy profits. This has allowed them to amass a cash reserve that they can use to cushion the impact of falling oil prices, thus somewhat insulating them from the shenanigans of OPEC.

And OPEC member nations also have their own problems, particularly Venezuela, where over a decade of crony socialist control has largely wrecked the once highly efficient and profitable state oil company PDVSA. Oil sales at a premium rate is literally the only source of income for Venezuela, so their participation in the current OPEC scheme may be limited. Then there is the unpredictability of Russia, the world’s second largest oil producer, which is not a member of OPEC. And Russia does not have a history of acting in the interest of others.

If the drop in world crude prices does end up precipitating an economic slowdown in the US energy industry, we can look for it to hit full-force right around the time that the 2016 presidential election will be ramping up. Such a downturn in the economy might be the final nail in the coffin of the presidential legacy of Barack Obama.

Meanwhile, we can at least enjoy a nationwide gasoline average price heading downward toward $2.50 per gallon and perhaps even lower in 2015.

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