Thanks To Fracking, OPEC’s Chickens Are Coming Home To Roost

Published March 22, 2016

Plummeting oil prices, which are largely the result of the U.S. hydraulic fracturing revolution that has nearly doubled oil production in the United States since 2008, have left many oil-exporting nations around the world reeling. The price drops have been particularly hard on nations in the Organization of Petroleum Exporting Countries (OPEC). Myriad OPEC governments are now stuck relying on dwindling oil revenues to fund large portions of their important social welfare programs, many of which are essential to maintaining national stability.

The fracking revolution virtually guarantees OPEC’s pain is unlikely to let up anytime soon, and they deserve every bit of it.

Most OPEC nations have historically opposed allowing their citizens to have the same freedoms people in Western nations take for granted. Some OPEC governments have even been accused of violating human rights. This has led to calls from many, both in OPEC nations and in nations in other regions of the world, for social or political change. To keep their populations content and disinterested in serious political reform, some of these regimes have used oil money to fund extensive social welfare programs.

Before the rise of fracking, these oil-exporting nations often conspired together to deliberately keep oil production low, thereby artificially raising oil prices. This allowed them to use higher revenues to benefit their populations at the expense of people living in oil-importing nations, such as the United States. Americans have for decades paid higher oil prices than a truly free market would dictate, but with the rise in domestic oil production, the power of OPEC has been reduced markedly.

Fracking has fundamentally altered the way oil and natural gas are produced. Rather than investing billions of dollars and five to 10 years in large offshore oil projects or drilling in the Arctic, oil companies are beginning to flock to shale oil fields, which can typically be drilled within 20 days and cost a few million dollars per well. Fracking costs substantially less time and money compared to the larger drilling projects oil companies have been investing in for decades, and as a result, the wheels on many of these larger projects have already started to fall off. Foreign producers are now failing to complete 80 percent of their megaprojects on time and without going over budget, which bodes poorly for nations that are highly dependent upon oil revenues.

In an effort to drive many U.S. oil producers out of business, OPEC has chosen not to decrease its production, thereby allowing the market price of oil to continue to decline. OPEC hopes it can destroy its competition and then reinstitute its low-production policies to drive prices back up, but according to Daniel Yergin, a leading scholar on energy and geopolitics, this strategy will ultimately be unsuccessful.

According to Yergin, “It is impossible for OPEC to knock out the U.S. shale industry though a war of attrition even if it wants to, and even if large numbers of frackers fall by the wayside over coming months. Mr. Yergin said groups with deep pockets such as Blackstone and Carlyle will take over the infrastructure when the distressed assets are cheap enough, and bide their time until the oil cycle turns. The management may change and the companies may change but the resources will still be there.”

As oil prices begin to modestly recover and technological advancements continue to make shale oil less expensive to produce, oil prices will likely be tempered by shale drillers, who can bring new supplies to the market faster and cheaper than conventional oil producers. This is bad news for the many oil-exporting counties who would likely face the prospect of economic, financial, or social unrest if low oil prices persist, such as Algeria, Brazil, Ecuador, Nigeria, Russia, and Venezuela. The problem with OPEC’s brand of socialism is that oil money inevitably runs out; eventually, innovation always defeats despotism.

Because of fracking, OPEC’s strategy to keep oil prices artificially high by limiting oil production is no longer effective, and the current “price war” is destined to fail as a result. The tables have turned—or are in the process of turning—and the governments of oil-exporting nations that once purchased domestic peace at the expense of countries such as the United States may soon find themselves out of power.

Don’t feel too bad for these regimes, though; OPEC’s chickens are simply coming home to roost.

[Originally published at Independent Journal Review]