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Skip to 0 minutes and 1 secondThe lowest prices in more than a decade are driven by an oversupply of US shale players. OPEC, the Organization of the Petroleum Exporting Countries, is the production cartel of more than a dozen Middle Eastern countries led by Saudi Arabia, Iran and Iraq. The strategy of the OPEC has been drowning the market in fuel to put U.S. producers out of business and hold onto their market share. Saudi Arabia has played the oil card before. In the 1970s, OPEC cut oil exports to the U.S. after America backed Israel in the Yom Kippur War. OPEC, which produced more than half the world's supply of oil, was successful in driving up prices and hurting the U.S. economy.

Skip to 0 minutes and 57 secondsBut fracking has cut into its market share. OPEC is now producing less than half of the world's supply of oil. Saudi Arabia especially needs that market share. The goal now is to lower prices and force unconventional drillers out of business.

Skip to 1 minute and 16 secondsIt's a simple plan: the higher the supply, the lower the cost. The lower the cost, the less profitable it is for U.S. drillers to produce.

Shale revolution and OPEC

OPEC’s response to American shale oil was to create a supply glut, which would bring down the price of oil.

As far as the logic went, if oil price was too low, it would drive the high-cost shale oil producers out of business.

OPEC is facing some of the most severe threats in its 56-year history. The inability of OPEC to agree to production cuts triggered a battle for market share, both inside and outside the cartel.


References:

  • Thijs Van de Graaf, “The future of OPEC: it won’t die, but it will become a different animal,” Energy Post, November 28, 2016.

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This video is from the free online course:

Global Resource Politics: the Past, Present and Future of Oil, Gas and Shale

Hanyang University

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