By Courtney Bliler
The past six months have been quite remarkable for consumers of gas and oil. Gas prices in some U.S. states are falling below two dollars per gallon for the first time in half a decade and families are finally receiving some financial relief at the pumps. What is the impetus for this drop? Shale oil production.
This emerging sector of the energy market has been praised as a gateway to U.S. energy independence. Nevertheless, while these low energy prices benefit U.S. consumers, questions remain as to whether the price slump will hamper investment in new shale oil production sites. Industry data firm, Drilling Info Inc., reported that permits for new U.S. gas and oil wells fell by approximately 15 percent in October 2014 and another 40 percent in November 2014.[i] [ii]
In response to the U.S. shale oil boom and tumbling oil prices, OPEC chose not to cut production and raise oil prices to their previous levels, opting to maintain current production quotas and keep prices low. At first glance, this seems to contradict a cartel’s traditional ethos of controlling production in order to keep prices and monopolistic profits high. Yet, because shale oil production is more costly than conventional oil production, OPEC—particularly Saudi Arabia— hopes to undercut North American producers by depressing prices, slowing investment rates in American shale oil, and eliminating the profitability of the U.S. shale oil industry.[iii] Ironically, OPEC, a monopoly by nature, is tapping into free market logic of efficiency and self-regulating price systems to justify its decision.
While some analysts are concerned that OPEC’s policy will succeed in prolonging the oil price slump in the United States, other analysts argue that OPEC cannot halt North American shale oil growth in the long run. While Saudi Arabia is endowed with a cushion of excess spare oil production capacities, low production levels have and will continue to hurt many other OPEC members.[iv]
Already Venezuela is starved for funds. Its currency and bonds have taken a dangerous plunge.[v] The Russian ruble has also plummeted in value. According to many analysts, OPEC will eventually be forced to decrease its production quotas in order to raise prices and revenues once its members are strapped for cash, at which point investment in the U.S. shale oil industry will likely pick up again. Daniel Yergin, vice chairman of IHS Inc., predicts that OPEC will be compelled to convene an emergency meeting early next year because its member countries will be unable to shoulder the burden of low oil prices exacerbated by low production quotas.[vi]
Yet, while most of the focus thus far has been directed at either the United States or OPEC as an organization, few have analyzed the potential impact of U.S. shale oil expansion on the internal politics of OPEC member nations. Most members of OPEC are rentier states and dependent on oil sale revenues, which they distribute as subsidies and social welfare to their populations in exchange for political stability.
Moreover, with large oil revenues, rentier governments do not have to levy taxes and can operate largely independent from the constraints of public opinion. In states like Algeria and Saudi Arabia, there is a long-standing social contract: the government provides subsidies and services without imposing taxes, while the population makes few demands of the state and respects the political status quo.[vii]
If OPEC policies continue to deflate oil prices and revenues, rentier state coffers may quickly dry up. Furthermore, most states that are dependent on oil rents have extremely undiversified economies, meaning that governments of the Gulf and North Africa will have no other industry to turn to if oil production and price levels are not changed to reopen the spigot of revenues to these countries.
Nonetheless, this need not be a harbinger of doom for oil-dependent states. As Ramzi El Houry of Al-Jazeera America has duly noted, “If low petroleum prices are part of a permanent trend, better for the Gulf states to make the painful yet necessary structural reforms sooner on their own terms rather than have those changes imposed on them later.”[viii] Gulf states and other oil-dependent governments should make efforts now, while oil prices are low, to diversify their economies and create industries that do not reward mere possessions of natural resources but instead require productive efforts created by the private sector.[ix]
As it stands, these rentier states, especially countries in the Gulf, seem to face a fundamental tradeoff. On the one hand, if OPEC keeps production and prices low, it could facilitate a decline in U.S. shale oil investment and push U.S. oil prices below the cost of fracking such that U.S. producers become unprofitable. But many OPEC members may eventually run out of oil revenue reserves before this happens, thereby jeopardizing their abilities to distribute subsidies to their citizens and maintain domestic stability.
On the other hand, if OPEC cuts production to restore high prices, this will foster investment in U.S. hydraulic fracturing and renewable energy and, over time, also reduce OPEC’s market share and influence on international energy production. While lack of economic diversification and bloated public sectors have been longstanding issues for oil-dependent states in the Middle East and North Africa, the United States’ rapid expansion into shale oil may bring a new push for change.
[i] McAllister, Edward. “Exclusive – October oil shale permits drop: is the slowdown here?” Reuters. 1 December 2014. Web. http://www.reuters.com/article/2014/12/01/us-oil-prices-shale-permits-idUSKCN0JF2CU20141201.
[ii] Hayes, Kristen. “Exclusive: New U.S. oil and gas well November permits tumble nearly 40 percent.” Reuters. 2 December 2014. Web. http://www.reuters.com/article/2014/12/02/us-usa-oil-permits-idUSKCN0JG2C120141202.
[iii] Lawler, Alex, Amena Bakr and Dmitry Zhdannikov, “Inside OPEC room, Naimi declares price war on U.S. oil,” Reuters, 28 November 2014, Web. http://www.reuters.com/article/2014/11/28/us-opec-meeting-shale-idUSKCN0JC1GK20141128.
[iv] Brenda Shaffer, “Saudi Arabia,” Energy Politics (Philadelphia: University of Pennsylvania Press, 2011), 55, Web, http://www.jstor.org/stable/10.2307/j.ctt3fhf4v.15?Search=yes&resultItemClick=true&searchText=energy&searchText=politics&searchText=saudi&searchText=arabia&searchUri=%2Faction%2FdoBasicSearch%3FQuery%3Denergy%2Bpolitics%2Bsaudi%2Barabia%26amp%3Bacc%3Don%26amp%3Bwc%3Don%26amp%3Bfc%3Doff.
[v] Gill, Nathan, and Katia Porzecanski. “Venezuelan Bonds Plummet as Devaluation is Spurned.” Bloomberg. 13 November 2014. Web. http://www.bloomberg.com/news/2014-11-13/venezuelan-bond-exodus-deepens-on-spurned-devaluation.html.
[vi] Domm, Patti. “Oil battle is sticky, but OPEC may be forced to act.” CNBC.com. 5 December 2014. Web. http://www.cnbc.com/id/102241579.
[vii] Donald L. Losman, “The Rentier State and National Oil Companies: An Economic and Political Perspective,” Middle East Journal Vol. 64 No. 3 (Summer 2010), 428. Web.
http://www.jstor.org/stable/40783108?seq=2&Search=yes&searchText=rentier&searchText=losman&list=hide&searchUri=%2Faction%2FdoBasicSearch%3FQuery%3Dlosman%2Brentier%26amp%3Bprq%3Dlosman%26amp%3Bso%3Drel%26amp%3Bwc%3Don%26amp%3Bhp%3D25%26amp%3Bfc%3Doff%26amp%3Bacc%3Don&prevSearch=&resultsServiceName=null.
[viii] Ramzi El Houry, “Low oil prices will actually help the Gulf,” Al-Jazeera America, 5 December 2014, Web. http://america.aljazeera.com/opinions/2014/12/oil-prices-opec-gulfsaudiarabia.html.
[ix] Ramzi El Houry, “Low oil prices will actually help the Gulf,” Al-Jazeera America, 5 December 2014, Web. http://america.aljazeera.com/opinions/2014/12/oil-prices-opec-gulfsaudiarabia.html.
