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Reuters in London

Two landmark events this month will underscore the extent to which the oil market’s balance of power has been transformed by the shale revolution.
In Washington, Congress will begin considering legislation to permit the export of crude oil from the United States, reversing a four-decade ban put in place after the first oil crisis in 1973-74.
In Vienna, the Organisation of the Petroleum Exporting Countries is expected to roll over its crude production target of 30 million barrels per day (bpd) even though prices have fallen more than 40 per cent over the past 12 months.
Rather than reduce production to boost prices, Saudi Arabia and the other Opec members are prepared to continue pumping to defend market share and maximise revenue.
After 40 years when Opec appeared to play the dominant role balancing supply and demand and influencing prices (sometimes successfully, sometimes not), power has passed to the shale drillers of North America.
Now it is the shale drillers who must decide whether to respond to the recent price rebound by re-activating rigs and completing more wells, at the risk of sending the price tumbling again.
The United States has always been a major petroleum producer and for much of its history it was a big exporter of both crude oil and refined fuels as well.
Between 1950 and 1970, the US share of worldwide crude production had fallen from 50 per cent to just 20 per cent.
Massive oilfields in the Middle East and Latin America that were put into production during the 1950s and 1960s unleashed a flood of cheap crude onto world markets.
The long period of low and falling real oil prices in the 1950s and 1960s stimulated a massive increase in oil demand while curbing investment in capacity in the US to replace depleting fields.
By 1972 the last remaining spare capacity in Texas had disappeared, handing pricing power to Opec, though the shift did not become apparent for a further 18 months, when the Arab countries cut production and embargoed the US in protest at its support for Israel in the 1973 war.
The US deficit in crude and refined fuels soared from US$2.3 billion in 1970 and US$7 billion in 1973 to US$24 billion by 1975 and US$75 billion in 1980.
There has never been a shortage of oil at any point in the last 150 years – it’s just a question of price, investment and technology.
The gap narrowed to US$30 billion in 1986 following the oil price collapse and an increase in US crude output but then began to widen again more or less continuously for 20 years.
Since 2005, however, the combination of reduced petroleum demand and the shale revolution has cut net imports of crude and fuels from 12.5 million barrels per day to just 5 million barrels per day in 2014.
There has never been a shortage of oil at any point in the last 150 years – it’s just a question of price, investment and technology
The last 70 years have seen repeated shifts in market share and power between the United States and the Middle East producers. The shale boom is just the latest manifestation.
In the 1950s and 1960s, it was the oil exporting countries that squeezed producers in Texas and the other US states. Now US producers are having the same impact in reverse thanks to the shale revolution.
The history of relations between the US and the oil exporting countries contains three clear lessons.
First, attempts to control oil imports or exports in the name of “national security” have never worked. The United States has been most secure when its domestic oil industry has been strong. At the moment that means permitting crude exports to enable domestic producers to realise the best possible prices and maximise production.
Second, Opec has only intermittently played a decisive role in shaping the supply-demand balance. For the most part, supply and prices have been driven by factors outside the organisation’s control, including the rapid growth in China in the 2000s and now the shale revolution.
Opec members have more often accommodated their policies to developments in the global market rather than the other way around. In that sense, the organisation’s response to the shale revolution has been consistent with past experience.
Third, reports of the demise of Opec are much exaggerated. The US accounts for about 10 per cent of global crude production, up from a low of less than 6 per cent in 2008, but still just half its share in 1970.
The US oil industry has become the marginal supplier of crude to the global market and is driving prices. But its market share is still just a quarter of the crude and condensates produced by Opec members.
 
 


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Macroscope | Oil balance of power shifts as US shale drillers and Opec producers vie for influence