My recent meetings in Dubai highlighted the profound change that will turn the balance of power in the energy industry on its head.
For years, OPEC was the puppet master, and the United States (and the rest of the world) were the puppets. They pulled the strings, and we danced. OPEC set the price of oil. OPEC controlled the supply.
But those days are ending. After dictating the course of oil prices for more than 50 years, OPEC is finding its influence diminished.
OPEC's oil ministers can read the handwriting on the wall as well as anyone. Not only are they about to lose the largest energy market in the world, but they'll soon be competing for the markets that used to be theirs for the taking.
Because in 2015 the United States will start pulling the strings...
The United States Will Dominate Production
U.S. unconventional oil production is poised to set the bar for the next generation.
Only a few years ago, the American economy was dependent upon imports to meet almost 70% of its daily oil requirements. Within the next five to ten years (perhaps even sooner), that figure will drop to about 30%. Most of that will come from Canada.
Coupled with huge reserves of natural gas, energy independence for both the U.S. and North America has arrived.
The difference, of course, is the shale revolution. Actually, this includes both tight and shale oil and gas. Both are hydrocarbons trapped inside rock formations, requiring fracking and horizontal drilling. "Tight" is a broader category including shale and other rock, especially sandstone lenses.
Definitions aside, this is a bigger "game changer" than anything that has come down the pike in the last two generations. It has fundamentally altered the landscape, and turned the U.S. into a net surplus producer.
The current low price of oil, and 2015 oil prices, won't change that.
Unconventional Oil Production Is Still Profitable
Technical advances have both improved the production and lowered the overall cost of oil drilling. Better drilling techniques and geological mapping have provided additional basins and deeper horizons. Environmental problems have been addressed in some dramatic improvements, lowering or eliminating the need to put dangerous chemicals downhole.
That isn't to say that fracking should occur everywhere.
There are still places were fracking should not occur - watersheds, seismically sensitive and active areas, and locations abutting population concentrations. Nonetheless, the projected volume of extractable reserves continues to increase, subject to one primary caveat.
The price of production.
Now, I just said that U.S. unconventional oil production can be profitable even at the current low prices.
This is different.
What oil pricing really affects is how oil reserves - that is, how much oil can be extracted - are calculated.
You see, most industry sources base their calculations on technical factors when they estimate how much oil and natural gas can be brought to the surface.
I prefer to expand that a bit and only consider extractable what can both be gained technically and can be sold at a profit.
As a result, my estimates of what is extractable tend to be more conservative than others. Still, even at today's prices, there are significant reserves available, and they outstrip any projected domestic demand.
The impact of such unconventional resources is clear when one is considering the American picture. That in itself would alter the international trade in oil and even natural gas (with the advent in 2015 of large U.S. exports of liquefied natural gas, or LNG). But the effect is even larger, and with it comes the hastening of OPEC's decline.
Global Oil Producers Are Following the United States' Lead
Each comprehensive study released of tight/shale oil and gas indicates the vast bulk of available reserves are located outside North America - more than 86% of the oil and 88% of the gas. The energy revolution is truly one that will be worldwide.
Those reserves can be extracted using current technology. In fact, the U.S. and Canada have been providing a "proof of concept" to the rest of the world for almost 10 years now.
It won't happen overnight. It will take other global areas longer to rev up production, there will be statutory and regulatory delays, additional needed (and costly) infrastructure, and the development of major new delivery networks.
But it is coming and will provide a major export market for U.S. technology and expertise.
This is one of the major concerns facing OPEC. Not only is North America off the map as a target for exports, progressively other parts of the world will be tapping new reserves and meeting more of their domestic demand locally.
Right now, OPEC represents about 40% of global daily production. The organization still has a say in what the energy market looks like.
But for OPEC, oil can no longer be used as either a weapon or as a lever.
There is simply too much production arising beyond the control of the cartel.
Russia, Mexico, and Canada have always been outside the OPEC orbit. And while Moscow has on occasion paralleled OPEC moves, one of the three most dominant oil producers has broken over the Saudi-inspired move to keep prices low. Russia is now fighting to save the ruble as its central budget disintegrates. The current price of oil is driving the Russian economy headlong into recession.
Meanwhile, the U.S. has emerged as a major global energy player. We're now in a two-horse race with Saudi Arabia for the lead in oil production.
At present, the rise in American unconventional production effects OPEC only in the expected decline of exports it can expect to move to the U.S. That's because exports of crude oil from the states is prohibited by statute.
But it's only a matter of time before American producers will be allowed to export excess production. And there is ample room for that without adversely impacting either domestic availability or price.
Not only is OPEC losing the largest market in the world - the U.S. - but the organization will soon have to compete with the U.S. and Canada for the lucrative European and Asian markets.
The cartel may play the game a bit longer of selectively cutting prices to one region or another, but this will only buy a few years. The end of hegemony is coming.
When OPEC decides to hold a wake, we will probably send flowers.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.