U.S., Russian Oil Production Threatens OPEC Dominance

[Arzamas 16]

U.S. politicians have long been fixated on the sway the Organization of the Petroleum Exporting Countries has on oil markets, and this year's presidential election has been no exception. But an oil boom in America, coupled with a boost in Russian production, is undermining the cartel's influence, making it likely the group will cut crude production to support prices.

Both President Barack Obama and challenger Mitt Romney claimed during the campaign that their approach would help America make do with less oil from OPEC. Yet change is already afoot in the U.S. oil market and this time it looks as if OPEC has more to worry about than do American motorists.

After three decades of decline—with easy-to-drill fields becoming depleted—oil production in the U.S. is rebounding. That is because higher crude prices and technological advances have enabled extraction from tight rock formations such as so-called shale reservoirs.

According to the U.S. Energy Information Administration, U.S. output—including other petroleum such as liquid natural gas—is expected rise to about 11.7 million barrels a day by the end of 2013, up 8.5% from the third quarter of this year. That would be close to the 12 million barrels a day of crude Saudi Arabia has the capacity to produce and above the Gulf state's current output of about 10 million barrels a day.

Already, oil production from North Dakota alone—at just above 700,000 barrels a day—has surpassed Ecuador's 500,000 barrels a day and is about to overtake Qatar's output of 750,000 barrels a day. Ecuador and Qatar are OPEC members.

As a result, imports are expected to account for less than 40% of U.S. oil consumption next year for the first time since 1991, according to the EIA, an authoritative source on global oil markets.

Some experts say OPEC crude is likely to be first to feel the squeeze. "This flood of U.S. crude is likely to put oil prices and OPEC output under downward pressure next year," Leo Drollas, chief economist of the U.K.-based Centre for Global Energy Studies, or CGES, wrote in a note last month.

As an example, the U.S. is the largest oil-export destination for OPEC member Nigeria, accounting for one-third of its foreign sales, according to the EIA.

The EIA sees a small drop of 490,000 barrels a day in OPEC supply next year, as it cuts output to support prices, while the CGES estimates that the resurgence in U.S. output will reduce global demand for OPEC's crude next year by about 670,000 barrels a day—about 2% of its current crude production of about 31 million barrels a day.

A drop in U.S. imports could also spark an effort to woo new buyers, putting pressure on prices.

Brent crude prices are currently at about $111 a barrel, while light, sweet crude on the New York Mercantile Exchange has been trading below $90 a barrel.

Moreover, it isn't just waning U.S. appetite for foreign oil that OPEC has to fear. Russia's production is also rising to levels not seen since the 1980s' Soviet era, thanks to an intensive drilling program supported by the Kremlin. Last month, production reached 10.46 million barrels a day, up 2% from last year's average and half a million barrels a day more than Saudi Arabia.

While Russia has pledged closer ties with OPEC, it would be unlikely to coordinate production cuts with the group to support prices.

"For us to join in production cuts, OPEC would have to offer us something very attractive that would compensate all the risks. I haven't seen any such offers," Igor Sechin, chief executive of OAO Rosneft—Russia's largest oil producer by volume—told The Wall Street Journal last month.

Some Middle Eastern experts say OPEC can partly mitigate the lost market share by taking advantage of an increase in its production flexibility. Unlike the U.S. and Russia, which produce every barrel they can, OPEC members intentionally leave some capacity idle, which they can use to try to influence prices.

"The importance of Arab oil-producing countries does not lie in its massive reserves alone but also in the spare productive capacity," wrote consultant Walid Khadduri in Saudi-owned newspaper al-Hayat Sunday.


U.S., Russian Oil Production Threatens OPEC Dominance - WSJ.com