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Disrupting OPEC:

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How American ingenuity and “tight oil” is fracturing the all-powerful cartel

The new energy abundance driven by unconventional oil and gas production is upending global politics on a wide range of issues. But nowhere is the effect more prominent than in the declining influence of OPEC. It took some time, but American entrepreneurship, innovation and technology have once again disrupted a comfortable cartel.

The story begins with George Mitchell, the son of Greek immigrants, and his dogged determination to liberate the natural gas trapped like little champagne bubbles in the shale rock of Texas. Mitchell spent half a century and nearly a quarter of a billion dollars researching and experimenting with different modes of coaxing that gas to the surface, ultimately succeeding well after the corporate giants of his industry had concluded it was not worth the effort.

Yet even a man with Mitchell’s vision could not imagine the far-reaching implications of his work. As late as 2000 – just on the cusp of the unconventional energy boom – Mitchell lamented that, for the United States, “a reversal of declining [oil] production doesn’t seem possible.”

In fact, thanks to the technologies Mitchell helped birth, the United States not only reversed that decline, but nearly doubled its production between 2008 and 2015. In 2013, the United States became the world’s largest producer of oil and natural gas combined. Today, the United States is the world’s largest exporter of refined products and is an exporter of both oil and gas.

This dramatic change in the U.S. energy position has transformed global energy markets, altering the sources of power of other countries and the terms on which they are able to use their own energy prowess to shape global politics. Nowhere is this more apparent than with OPEC.

Since its founding in Baghdad in 1960, the influence of OPEC has waxed and waned, but the organization maintained its sometimes disquieting ability to influence the prices Americans and others paid at the pump. OPEC has not set the price of oil directly, but instead calibrates the production of its own members – Saudi Arabia in particular – to affect the total supply of oil produced.

Members of OPEC are soon to meet in Vienna to discuss the possibility of extending production cuts to further boost the oil price. When they do, they will no doubt once again discuss how America’s fracking boom has undercut OPEC’s ability to play its traditional role. This curb on OPEC’s effectiveness is evident to those who watched the organization first founder in its efforts to respond to the 2014 price plunge and more recently in the fairly modest results it achieved through it attempts, alongside 10 other non-OPEC producers, to boost the price of oil over the course of 2017.

Some attribute OPEC’s lukewarm impact on the price of oil to high political tensions within the cartel. In reality, a far bigger and possibly more enduring challenge to OPEC is the new business model introduced to oil markets by America’s “tight oil.”

Tight oil is a different animal than conventional oil. While there are not molecular differences between the two once out of the ground, the process of extraction is very distinct. Conventional oil production involves complex and capital-intensive endeavors to tap into large underground reservoirs of oil. Such projects require big upfront investments and patience, as the development of such fields can take as much as 10 years from initial investment to first oil.

Tight oil is produced according to an entirely different business model than conventional oil. It demands constant small investments in new wells, but these are in the range of a million dollars, rather than tens or hundreds. And it rewards its investors with first production within, potentially, months.

As a result, hundreds of American companies now respond quickly to any increase in the global price of oil with new production in very short order. The net effect on OPEC? Whereas the members of the organization could often enjoy the higher prices their actions induced for years, now they must anticipate that any price lift they orchestrate will be met at least in part by the production of more U.S. tight oil.

Tight oil has not slayed OPEC – and we should expect markets to respond positively to any announcement to prolong or deepen cuts in the coming days. But, regardless of its efforts, tight oil has elbowed OPEC off center-stage, creating more room for the market in setting oil prices than has been the case for decades – and demonstrating yet again how American ingenuity can transform the international landscape.  

Meghan L. O’Sullivan is the author of Windfall: The New Energy Abundance Upends Global Politics, on which this article is based.

 


Meghan L. O'Sullivan

Harvard Kennedy School Professor | Author of Windfall

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