OPEC and Oil Production in North America

I found two articles regarding the role OPEC plays in the world's oil market. Their role has changed drastically since August 2010 when the United States was importing just over twelve million barrels of crude oil to August 2014 where imports of crude oil has fallen to just over 9 million. A major reason the demand for crude oil has change so drastically is that the United States is producing more oil. Since 2008 the production of oil in America as increased by 90 percent making them the world leader in oil production.

OPEC focused on what is best for oil prices, not what is best for an individual company and with the free market in the United States companies will begin to focus on their individual profits, and not the profits of the oil industry as a whole. This change in focus could change the prices of oil in a good or a bad way for consumers. The supply and demand of oil product will cause the increases and decreases in prices.

With OPEC refusing to reduce the amount of crude oil they produce and the Americas producing massive amounts of oil the market is going to become saturated eventually lowering prices. The price reduction seems to be what OPEC wants to happen, because the U.S. and Canada cannot produce oil at the low cost that the OPEC countries can produce at. With recent innovations in oil production in the U.S. and Canada, they are becoming more competitive concerning the cost of production, but are not as cost efficient as OPEC nations.

Essentially OPEC wants to drive the U.S. and Canada out of the market creating the same type of market structure they had in the 70's. This type of market share for OPEC  would let them control the oil prices again. OPEC is using the prior market structure of perfect competition to try to bully out their competitors. I question if this will be good or bad for the price of oil because it may cause the oil prices to drop in the short run, but in the long run the prices of oil through out the world will increase if OPEC succeeds in pushing U.S. and Canada out of the market.


1 comment:

Dave Tufte said...

Dawn: 82/100 (I think your use of "when" and "where" in the second sentence is OK in some contexts, you mean "changed" not "change", you mean "has" not "as", you mean "Americans" not "Americas", I will let you slide on "prices" vs. "price" because these are interchanged casually in discussions of oil, you mean "throughout" not "through out".

There's a lot of ... not exactly misinformation about oil out in the media ... but maybe I should call it poorly informed or something like that. It's hard for me to tell which parts are coming from the media saturation with oil news that we all get, or from Dawn restating this in her own words. Anyway, here's the stuff I think needs to be steered better.

1) OPEC is dominated by Saudi Arabia. It tries to operate as a cartel, but many large oil producers are not part of it, so it's ability to do this is limited. The international crude oil market is more like a standard oligopoly.

2) OPEC is much more important to Japan and western Europe than it is to the U.S. In the U.S. we probably shouldn't worry about it as much as we do.

3) Using crude oil imports to describe the U.S. oil situation is common, but probably misleading. We don't import all that oil to "use it". Instead, we import it, refine it, and export it again. But when we export it, it's not counted as crude oil any more because it's been refined into other stuff.

4) Due to laws passed in a panic in the 1970's, it's very hard to export any crude oil from the U.S.

5) U.S. crude oil production has gone way up over the last 10 years. We are now the largest producer of crude oil.

6) The idea described at the end, of driving your competitors out of the market and then raising prices, is called predatory pricing. It is a very popular argument outside of economics. Within economics though, we've looked at a ton of examples of that, and haven't found that it's a viable strategy: when you raise prices your competitors just pop back up again.

I think it's kind of weird that Dawn wrote that "OPEC focused on what is best for oil prices". Are prices something that something can be "best for"? I think the point she was trying to make was that OPEC was trying to find the price that was best for the group as a whole, rather than its individual members.

I also thought it odd that Dawn suggested that market saturation was going to make prices fall. Hasn't that already happened? Perhaps she meant it's going to go down further. I'm not sure.

I think Dawn is right that OPEC is trying to push some producers out of the market. But, this is really Saudi Arabia (the lowest cost producer in OPEC) doing this. And I really don't think they're that worried about U.S. producers. The main target is Iran, which is a high cost producer, and a military threat much closer to Saudi Arabia (heck, those two are already fighting a proxy war in Yemen). Pushing prices down will hurt Canada a lot (their oil is expensive to get out of tar sands).

It's not clear that lower prices will hurt U.S. producers much. Horizontal drilling and fracking are relatively new, and we don't have a lot of experience with how they weather market changes. What we suspect is that drilling and pumping probably behave more differently with the new techniques. Lower prices are going to hit U.S. drilling hard (and have already done so) because new horizontal wells are expensive. But existing horizontally drilled wells are very efficient to run, and may have no problems with the low prices.