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OPEC versus US shale

OPEC versus US shale
The dramatic movement in crude oil prices poses a challenge for shale oil, which has fueled the US oil boom. According to the Energy Information Administration, currently the US produces almost twice as many barrels a day of crude oil versus the mid-2000s – all thanks to the shale oil revolution.

PricewaterhouseCoopers summarized the global impact of the revolution in one of its recent reports.

“The global impact of shale oil could revolutionize the world’s energy markets over the next couple of decades, resulting in significantly lower oil prices, higher global GDP, changing geopolitics and shifting business models for oil and gas companies,” the report states.

Following this particular revolution, the US has become a full-fledged competitor in the oil market – with its pros and cons. Some experts believe that OPEC’s recent decision not to cut crude oil production is part of a deliberate strategy to fight off the competition from the US shale oil industry and maintain its share of the US market. In other words, it’s OPEC versus US shale.

The shale oil revolution in the US changed the speed, with which the market could react to falls in prices. To illustrate, the reaction speed in the shale oil industry is a lot quicker than in traditional huge oil projects, which can take quite a lot longer before capacity cuts kick in and rebalance the market.

“Typically, an oil well will run for between five and ten years at a good level of production, a well in shale formation typically you drill the well, year one – you get a 100, year two – you get something like 60, year three – you get something like 30 – it declines very-very quickly. So in order to keep production at a certain level you need to keep drilling new wells and keep investing. What that means is that if you suddenly get a price, which makes that drilling uneconomic then fairly quickly production will tail off,” Alex Griffiths, Managing Director at Fitch Ratings in London said.

Now, when OPEC’s decision was announced and oil prices reacted on the news and reached a five-year low, American motorist had plenty of reasons to celebrate. However, in oil-producing states like North Dakota and Wyoming, the celebrating sentiment was rather muted. People realized that low prices mean fewer jobs and less revenue for governments. North Dakota gets half of its revenue from oil, and for the next few years, the state had been counting on oil prices staying around $90 a barrel. Prices below $100 per barrel are hurting some of the higher cost US shale producers, and local consultancies have acknowledged that at current prices, drilling new wells is already unprofitable in some places.

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