The Saudi government’s decision to decrease its dependency on oil is the final confirmation that the Kingdom’s international swing producer role is coming to an end. The decision would have long-term significances for The Organization of the Petroleum Exporting Countries (OPEC) and energy markets.
The last two years have been difficult for OPEC; the low oil prices that impacted the markets in June 2014 have had a disastrous effect on the budgets of its members. The oil sector also had to face difficulties.
The existing crisis is not just a reflection of supply and demand instability, but of a fundamental change that occurred due to the US shale revolution.
The increase in non-conventional oil production in the US surprised the world and rapidly changed OPEC-dominated oil markets.
OPEC, led by Saudi Arabia decided against reducing production, but instead sought to emphasize maintaining their market share. The reason behind the strategy was that high-cost producers, mainly the U.S shale sector, would not be able to withstand the duration of low oil prices for long. The kingdom had misjudged the resilience of the U.S oil sector.
Two years since the crisis began, the US shale sector is witnessing a complex period of restructuring, with 50 oil firms having applied for bankruptcy. However, production has reduced only marginally, due to better productivity and cost reduction.
The declining trend would continue. However, it would contribute to global supply and demand rebalancing, and an increase in oil prices.
In spite of the existing problems, the US shale industry has robust projections. The development of a new shale field doesn’t take more than a year, and North American shale has the shortest payback time of all international oil expansions.
In such conditions, the U.S oil sector would have the capability to rapidly revive production once demand and prices move upward.
The members of OPEC would continue to be key players in international oil markets. However, the cartel doesn’t have its privileged capability to regulate global oil prices. This will undoubtedly weaken its structure, and possibly affect the political dynamics in the Middle East.