For a great many years, the Organization for Petroleum Exporting Countries (OPEC) has monopolized the world market for oil. Basically OPEC had set oil prices at levels which most businesses would consider exorbitant, but they could do so because they had control of the market; shipping most of the world's oil.
In subsequent years, other countries have developed their oil reserves and have come into the market as global suppliers. Generally, these new suppliers were small and did not threaten OPEC's market control. However, that situation has slowly changed. For example, in the first quarter of 2014 both the United States and Russia exported more oil than did OPEC.
With the new suppliers, there is not a glut of oil, but availability is abundant and the market price has naturally fallen
OPEC members met on November 27 to review their strategy. They were obviously losing control of world oil market. One option was that they could cut production rates to decrease oil supply, which would automatically raise prices. But, that would be of no help in maintaining profit, because the higher price would not compensate for the loss of volume. In addition, it would do nothing for their ability to reestablish global oil market control. Therefore, they took the big option, which was to do nothing.
The big option is to basically force out of business new marginal-cost producers. OPEC can do this, because it is a low-cost producer, with Saudi Arabia having a leading role. In 2012, production costs in US dollars per barrel for several major producing countries were:
Saudi Arabia 24
OPEC 37
Russia 38
US 41
Kazakhstan 46
China 47
Norway 48
The first competitor to fall was Russia, which obtains most of its foreign currency from oil sales. Global oil price had fallen from a high of $110 to $70 and then to $60. Russia probably controls Kazakhstan, but Kazakhstan is a high-cost producer and no help. In addition, OPEC said it was willing to let the global oil price fall to $40 a barrel. That pressure on Russia led the ruble to fall 20% last Tuesday against the US dollar.
Iran as a member of OPEC. It is said to have budgeted its oil exports at $100 a barrel. With the current price of $60-70 a barrel, they are also in trouble, but apparently have been outvoted by the other OPEC members.
We will have to wait to see what other marginal producers will fall, but the significant one is the US. West Texas crude is said to be $56 a barrel and even at that low price, the market is weak, which is leading to a decline in production. However, the US as a whole is in good shape, not because of its low production cost, but because of ancillary factors. The US is the largest energy intensive country in the world. It uses more oil per capita than any other country. It now produces a very large amount of oil, of which some goes to export. But, it also imports oil. In other words, contrary to the situation with Russia and Iran, it's life economic blood is not in the global oil market. A tremendous amount of oil is used by the US for its motor fleet for gasoline and diesel. While it cannot compete with the Saudis on production, it still has a great advantage in being able to import low-cost oil, under the new structure. This counterbalances any need to shut down local production.
Similar to the US, but in a more exaggerated position, are Japan and Western Europe. Neither of these have any significant oil production and depend completely on global imports. With the price of crude all falling from $110 to $60-$70, it is a heyday for them.
Going back to US considerations, if cheaper oil imports are favorable to the US, where does this specifically apply? First, to the US public consumer. If every time I now fill my tank, instead of it costing $30, it now cost $20, that's another $10 in my pocket for spending on things. Commercial transportation is also a winner. Airplanes and trucks use a lot of fuel.. Tourism is boosted with cheaper travel costs. More pressure is put on wind and solar energy. Installed wind turbines and solar panels can keep operating. Their construction was previously unjustified without taxpayer subsidy, but even that justification is now significantly reduced. Natural gas will still compete in home and commercial heating. It still is as cheap as oil.
While financial markets and particularly the US stock markets do not know what to do with this new information, one thing is certain and important and that is it's big. The Dow and the NASDAQ have been fluttering up and down for several days. A week ago, there were big losses, but sooner or later it will realize that the immediate aspects of OPEC policy are favorable to the US. Perhaps not as good as for Western Europe and Japan, but still good.
What about the future? If OPEC is successful in regaining its monopoly position as a global supplier by having forced out other higher cost producers, it will likely raise prices through cutting production. But if the US maintains its position of being independent of global oil supplies, it can restart local production to satisfy its needs rather than continue to import. This is also true for other producing countries, but the US likely has an edge in a slowdown production procedure, because it will recognize the need to have standby production with ability to start up on relatively short notice of say a few months. During that time the US economy will proceed merrily on its way. Other countries which have depended on oil exports for their lifeblood will have devastated economies and likely be unable to start up oil production on short notice.
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