Shale Oil Versus OPEC+: A Clash of Titans in the Energy Arena
High oil prices often emerge from the depths of very low ones. This relentless cycle is fueled by the fierce competition between US shale oil and the OPEC+ coalition.
In the past, oil prices were largely dictated by the monopoly of OPEC. In a simplified game theory framework, when supply held sway, prices soared above $100. Conversely, during periods of weak demand and when the cartel lost control, prices dipped below $40. However, this oil oligopoly has been shattered. The United States has emerged as a major player in oil production.
This dynamic first occurred before 1982 with the rise of Mexican and Venezuelan oil, then again in 2014 with the emergence of the Shale Oil Industry. Today, with US oil production accounting for 15% of global output, the landscape has fundamentally changed.With weakened Chinese demand and the US dominating oil production, forecasts suggest a trajectory toward $50 per barrel.
However, this trend poses challenges for global geopolitics. Low oil prices incentivize geopolitical maneuvers by nations like Russia and Iran, with significant implications for world affairs. Historical events, such as Iraq's invasion of Kuwait in the 90s and Russia's annexation of Crimea followed by the conflict in Ukraine, underscore the destabilizing impact of low oil prices. It's in these periods of fluctuation that the true dynamics of the oil market are revealed—High oil prices often emerge from the depths of very low ones. This relentless cycle is fueled by the fierce competition between US shale oil and the OPEC+ coalition—
Thanks for reading,
Guillermo Valencia A
Co-founder of Macrowise.
Miami, February 15th 2024