In recent days, OPEC has been in turmoil due to lower crude prices. Saudi Arabia, OPEC’s most influential cartel player, has changed its focus. Instead of trying to control supply in an effort to maintain a price window of about $100 per barrel, their new strategy is to grow market share at the expense of other OPEC members. US imports from OPEC countries have been cut in half since the beginning of the recession, replaced mostly by increased domestic production. With the loss of revenue from the US market and the decline in demand from the EU, some OPEC countries, like Libya and Saudi Arabia, have increased production as a way to maintain or grow GDP. These few break-out OPEC members have not only increased production, thereby lowering Brent oil prices, but are directly competing with one another for the emerging Asian market. This move has the added effect of attempting to slow both US oil production and future domestic oil and gas investment based on lower oil prices.
Before you attempt to digest what this means to domestic oil investments, you should understand that not everyone in OPEC agrees with this strategy. This move to increase production, lower prices, and aggressively court specific markets stands to reduce revenues as well as market share for other OPEC members. According to Wikipedia, some OPEC countries derive most of their GDP revenue from petroleum exports (UAE 53%, Angola 97%, etc.) Saudi Arabia is the primary actor in this increased production strategy. This move could ultimately backfire on Saudi Arabia, the de facto leader of OPEC, from other OPEC members who desperately need the higher price for crude oil to fuel their economies. Some OPEC members are requesting a special OPEC meeting to deal with the drop in crude prices, while some countries like Iran are specifically calling for cuts to OPEC production. It should be noted that Saudi Arabia tried to reduce production this summer but was unable to gain consensus from the other OPEC members, so it reversed course. Perhaps Saudi Arabia’s recent strategy will make OPEC members originally hesitant to reduce production this summer reconsider their reluctance, and support cuts in production to return prices to about $100 per barrel.
When you couple this recent move by Saudi Arabia with the rise in Sunni and Shiite tensions, as well as the ascension of rebel groups such as ISIS and other Islamic militant groups in oil producing nations, we could soon see terrorist activity with the goal of reducing and/or destabilizing the flow of Middle Eastern and West African oil to world markets. Any disruption in the flow of oil will put further pressure on the US to end its ban on exporting its superior light sweet crude oil. In the end, the recent drop in crude oil prices may actually turn out to be the nudge necessary to set into motion actions that will ultimately elevate the prominence of United States oil industry.