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
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.