Q&A: Oil Price Slump Temporary amid Changing Supply Dynamics
Rigzone: So, is it now up to the United States to cut back on production?
Krane: This is a major new development. Texas was once the swing supplier of crude oil. That changed in the 1970s, and since then, OPEC has controlled the supply of oil on the market, and thus the price. But now, because of unconventional drilling, the United States is a swing supplier, too. The Saudis are no longer the only global swing supplier. That role seems to be devolving to shale producers in the United States. They have that flexibility now to increase or decrease oil production when market conditions dictate. That seems to be a new dynamic that we’re watching unfold right before our eyes.
Rigzone: Some analysts have suggested that perhaps OPEC did not intend for prices to fall this much, or this quickly.
Krane: While OPEC acted to weaken crude oil prices, they probably overshot the mark on the way down. OPEC opened the taps, letting more crude oil into the market to lower prices. However, there could have been an overreaction, given how far prices have fallen. By the end of the year, prices might reasonably be expected to be back up in the $70s/barrel, barring a serious geopolitical event.
The big change is on this side of the globe, and that’s where production is going to have to fall so markets are balanced again. It’s a rational and reasonable course of action – or inaction – for OPEC. They don’t want to see someone else take their market share. They will have some short-term pain because they won’t have the same revenue from oil, but that’s the price they’re going to have to pay to maintain their share of the market.
Rigzone: That sounds like producers everywhere are going to lose.
Krane: A short-term drop in prices might not be all bad, since it could help increase demand, which will in turn help the oil industry. Demand has been dropping. We’re coming out of a recession, cars have gotten smaller and more economical, and there have been economic slowdowns all over, including in China, where demand growth had been strong. Oil prices have fallen below the average global cost of production of around $60. At some point, supply and demand will rebalance. Discounted oil will rekindle stagnant global demand. So, to the extent that lower prices can spark some economic growth here and bring back higher demand, that’s a good thing.
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