American oil production has increased by 9% over the past eight months. This puts another 9.3 million barrels onto the market over that period. While OPEC makes attempts to keep oil prices up by restricting supply, the US profits from that by increasing production when prices are high. Many OPEC countries wonder why, when US oil stocks are already high – why to produce more.
The answer is simple one. The US is using OPEC’s attempts to keep oil prices up by pumping out oil while it is profitable to do so. OPEC agreed last week to extend the 1.8 million barrel per day production cut until after the first Quarter of 2018. This was in an attempt to maintain oil prices. The overall goal of these cuts is to reduce the world’s inventory of 3 billion barrels of crude to nearer the five-year average of 2.7 billion barrels.
A drop in oil price would not suit anybody other than the consumer. Low oil prices would cut back development and new exploration, and rapidly eat through existing stocks. However, OPEC’s efforts to reduce stockpiles of crude are being undermined by the US who seems set on increasing oil production rather then reducing it.
The issue here is that while OPEC is cutting production to help maintain prices, the US is using these ‘maintained’ prices as a reason to continue producing. Some believe the break-even oil price for US shale oil companies is $50 – $55 a barrel. Daniel Yerkin, Chairman of IHS Markit, claims that drillers in Houston, Texas, can profit at $40 a barrel.
Nothing will stop Americans drilling for oil – traditional or shale – other than if the going price is too low for them to profit. While oil prices remain high, US firms are maximizing the efficiency of their drilling operations. This offsets the rising costs of shale recovery.
OPEC and the US have differing commitments. The one is to its individual members, and ensuring that oil production is profitable. The US commitment is to the USA alone, and ensuring that the oil industry is profitable enough to maintain profits and employment in the industry.
In fact, both sides – if they are on different sides – know that oil production must be profitable. Who can blame either body for doing all it can to attain its own objectives. The trouble is that that these objectives are not common ones, and much may change if President Trump decides to sell off half his oil reserves.
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