On Thursday, West Texas Intermediate, the primary oil pricing benchmark for U.S. crude oil, fell to less than $60 for the first time since July 2009. During the past week, both small and large U.S.-based oil producers have made a flurry of announcements that they would significantly scale back the number of rigs, cut capital expenditure or a combination of the two in U.S. shale oil plays over the next few months. With these announcements, it seems that the United States has blinked first in its standoff with OPEC amid falling oil prices, which have tumbled more than 40 percent since mid-June.
In addition, on Dec. 9 the U.S. Energy Information Administration released its monthly Short-Term Energy Outlook, which forecast that U.S. oil production would be an average 9.27 million barrels per day in the first quarter of 2015 and remain at that level in the third quarter (current oil production is estimated to be at 9.11 million bpd). This estimate is a downward revision over previous estimates by 100,000 bpd in light of falling oil prices.
Though U.S. oil growth may even out, if not decline, during the next year, a rebound for oil prices seems unlikely at this point. The North American economy remains healthy, but it is also a mature oil market with demand that remains in structural decline and has never returned to oil consumption levels seen in the mid-2000s. Elsewhere, the European and Japanese economies are floundering and are likely to do so through most if not all of 2015. China, despite its economic slowdown, seems to be the one dependable market for healthy oil demand, but it is not the dominant consumer of oil as it is of other commodities, such as iron ore or soybeans. As a result, many have forecast weak oil demand growth in 2015 and continued low prices — a view that Stratfor shares. The continued fallout from low oil prices will be a defining geopolitical storyline of 2015.
For now, some of OPEC's members can breathe a sigh of relief. All eyes have been on the organization and whether it would lower production in order to defend the market. Instead, Saudi Arabia and Kuwait, OPEC's two largest swing producers, went against the wishes of the organization's other members. Kuwait and Saudi Arabia prioritized preserving market share in Asia, their largest export markets, and gave major Asian consumers discounts in order to undercut other oil producers. As long as the price of oil does not continue falling at the same pace it has thus far, the Saudis and Kuwaitis can be fairly comfortable in this environment. OPEC is likely to maintain its position, though normal production fluctuations will remain, especially since the organization knows that oil production in the United States has hit a balancing point. If OPEC cuts oil production now to raise the price back to $75 or $80, many of the producers slowing down production in the United States are likely to re-enter the market, undermining the OPEC cuts. Unplanned cuts, such as the halting of Libyan oil exports, would create similar circumstances.
Meanwhile, oil producer Venezuela will continue its current tailspin. Caracas requires global oil prices well above $100 per barrel to fund its heavy deficit spending, and the government is now scrambling to find a solution to its funding shortage, which will most likely require a major cut in public spending. The slowed inflow of dollars to fund government imports has exacerbated shortages of food and consumer goods. The lack of dollars has also caused a major depreciation of the bolivar, whose value plummeted from 100 bolivars to the dollar in late September to nearly 180 bolivars to the dollar in the second week of December. The high inflation, extreme shortages and economic recession driven by the reduction in petroleum income will erode the popularity of Venezuelan President Nicolas Maduro and could spur protests or threaten the ruling party's performance in the 2015 legislative elections.
While much attention has centered on the standoff between the United States and OPEC over falling prices, they are largely fighting over different markets. In a sense, OPEC was fighting with itself as much as it was fighting with the United States. The weak global economy likely would have resulted in lower prices even if U.S. production began to fall earlier this year, and that alone would have resulted in some sort of price war between Iran, Iraq, Saudi Arabia, Angola and other major oil exporters to Asia in order to maintain their own shares in that market. While rising U.S. production likely has accelerated this process, it would have occurred nonetheless.
OPEC's relevance as an energy organization has declined significantly since the 1970s. It no longer has the pricing power that it once had, and even $60 per barrel oil prices are within historical norms. Now, perhaps more than ever, oil prices are shaped by global finances, demand, and supply economics and security. Political intervention is still possible, but it would require drastic measures. In the current environment, OPEC's greater concern is probably not the growth of U.S. oil production — a market that is less than 10 percent of OPEC's market — but making sure that market conditions do not arise that make unconventional oil and natural gas developments profitable within the organization's export markets.