OIL WARS: OPEC Production Cuts and the Illusive Power of Dealmaking.

Arguably, the most influential event that led the price collapse was the shale revolution. In June 2014, the U.S. became the leading global oil producer, surpassing Russia and Saudi Arabia for the first time since 1972. In effect, America took on the role of the global swing producer – it can increase or decrease production in response to price fluctuations faster than other countries. At its height in early 2015, U.S. oil production reached 9.6 million barrels per day. As a result of the price drop, it has since fallen by 900 thousand barrels – but American companies can quickly rekindle output to 10 million barrels and beyond. One of the main reasons for that is a technological feature of shale deposits: due to their small size, drilling new wells is not capital intensive. As a result, production volumes can be quickly increased. This is quite different from the big wells on traditional deposits – oil fields in western Siberia, for example.

But let’s assume that OPEC gets its act together and delivers on its promises to enforce production cuts (a big if). Let’s say that Russia follows suit and takes its small share of 300 thousand barrels a day off the market (another big if). What would happen then? The market, impressed by exporters’ discipline, would react with a modest rise in oil prices (modest because the declared cuts are modest, too). But then higher prices would allow the U.S. to pump increased volumes of crude. This oil would eventually fill the market niche vacated by OPEC and thus effectively make the production cuts meaningless. Back to square one. Welcome to the world of shale economics!

Indeed.

None of this is news to Instapundit readers, but have you hugged a fracker today?