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Is There a New Balance of Power In Oil?

Is There A New Balance Of Power In The Oil Industry

Anyone who lived through the OPEC oil embargoes of the 1960s and ’70s thought that idea of the United States once again dominating the oil market was a dream that would never come true. While bell bottoms and disco may have gone the way of the dodo, it seems that once again the US is poised to be the world leader in energy production, or at least a major player. In spite of the efforts of the current administration to thwart the efforts of American oil interests, the free market looks like it once again will win out over a force bent on price fixing and market domination.

The Fall of the Saudis

Unless you have been living in a remote part of the world, it is hard to miss the drop in gas prices over the last year or so. Oil prices have plunged from over $100 per barrel to a low of $45 bringing down the cost of gasoline and giving a much needed break to business and the private sector alike. Typically when prices fall like this, the Saudi Arabian oil princes will just cut their production to keep prices high and the dollars flowing their way. This time something has changed. There is a new player in the market.

With the rise of US oil production due to fracking and shale extraction, OPEC member nations are now afraid to raise their prices. Enterprising US oil companies might be able to take advantage of the fact that they could undercut the rising OPEC prices and gain market share. That a risk that most Saudi Oil princes dare not take.

The market previously stood with OPEC dominating nearly 40 percent of the market. With the rise of US oil production, that share has fallen to 30 percent and not likely to recover soon if ever.

The Flexibility of Shale Drilling

The Flexibility Of Shale Drilling

Shale oil is quite different than the traditional Saudi Oil fields. By its very nature shale oil has to be flexible. Fracking produces wells that dry up quickly so drilling is an ongoing process. This flexibility allows US oil producers to take production from 0 to 60 in a way that Detroit car manufactures have not been able to do in years.

While the industry has been cutting jobs, nearly 100,000 since the fall of oil prices, things are starting to look up as prices rebound. This means the small players are exiting the field, leaving the big boys there to pick up premium fields as well as benefit from a reduction in competition for drillers attention. This means if OPEC decides to get up to their old tricks, US oil companies are well positioned to put up a fight. A fight OPEC doesn’t want.

Score Another One for the Good Guys

Falling prices also hurt two of our other favorites in the world market: Russia and Venezuela. Both of the economies of those countries are dominated by their energy exports. Falling prices and increased US competition has loosened their stranglehold on their neighbors who are dependent on their energy imports from these totalitarian regimes. Both Russian and Venezuelan companies are now being forced to compete using free market tactics instead of bullying their customers like they have in the past. If they don’t, they risk the well-being of their entire nation.

While the market still needs some time to settle out after the latest crash, it looks like the US is now a major player in the energy game and will be for the foreseeable future.