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Who is OPEC and why do they matter?

If you have anything to do with shale or follow energy news you have probably heard of OPEC. When I first started I kept seeing it pop up in articles and I just glanced over it. I honestly did not pay much attention to it. Although I know now that it is pretty important.

 

This is the definition of OPEC according to Wikipedia:

“Organization of the Petroleum Exporting Countries. OPEC is an intergovernmental organization headquartered in Vienna, Austria. OPEC was founded by five petroleum-exporting nations at a conference held 10–14 September 1960 in Baghdad, Iraq. The formation of OPEC represented a collective act of sovereignty, and marked a turning point toward state control over natural resources, at a time when the international oil market was largely dominated by a group of multinational companies known as the "Seven Sisters". In the 1960s, OPEC ensured that oil companies could not unilaterally cut prices. In the 1970s, supply restrictions led to a dramatic rise in oil prices and OPEC revenue and wealth, with lasting and far-reaching effects for the global economy.”

 

A shorter definition is OPEC is a cartel of major oil producing nations, dominated by Saudi Arabia. OPEC is like a big oil bully. Essentially their main goal is to be dominate in oil production and to push the US out of the global oil market. They for the most part control global oil prices.

 

So why is this important to US Shale? Well you might be able to answer that by now. OPEC lowers the prices, production goes up, shale investment goes up. OPEC wants the prices up but won’t let that happen too fast to allow for a flood of shale investment.

 

Shale might be a key to the end of OPEC. Investopedia has a good summary on the future of OPEC.

 

“But OPEC's monopoly over oil prices seems to be in danger of slipping.

 

The discovery of shale in America has helped the country achieve near-record volumes of production. According to the Energy Information Administration, U.S. oil production is estimated to peak at 9.7 million barrels this year. The last time that production was this high was in 1972, when U.S. oil production peaked at 9.6 million barrels per day.

 

Shale is also gaining popularity beyond American shores. For example, China and Argentina have drilled more than 475 shale wells between them in the last two years. Other countries, such as Poland, Algeria, Australia, and Colombia, are also exploring the prospect of shale formations.

 

The Iran-U.S. nuclear deal is expected to further introduce more oil into the market. Iran, which is not a member of OPEC, could reach 2.4 million barrels of oil by 2016. Geopolitical tensions within the Middle East, such as the rise of ISIS, whose leader has already called for the bombing of Saudi Arabia (OPEC's largest oil producer), and Yemen's disintegration could also destabilize oil supplies.

 

The spending habits of OPEC's Arab monarchies may also put downward pressure on oil prices. For example, Arab monarchies, which produce the bulk of OPEC's oil, are busy ramping up spending at home to avoid a repeat of uprisings (such as those that occurred during the Arab Spring) in their countries. Demand from developing economies, such as China and India, has also skyrocketed, putting additional pressure on prices in the face of constant production.”

 

What do you think? Does OPEC have a future? Can US Shale production edge them out? Let us know by commenting below!

 

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