OPEC Doesn’t Understand The U.S. Oil Industry

OPEC’s secretary general has asked U.S. shale oil producers to cooperate with the cartel to keep the global oil market out of an oversupply situation. That betrays a fundamental misunderstanding of how the U.S. oil industry works.

Last week some comments from OPEC Secretary General Mohammed Barkindo signaled that OPEC may not understand how the U.S. oil industry functions.

Reuters reports that Barkindo urged cooperation from U.S. shale oil producers to help keep the global oil market out of an oversupply situation. Barkindo stated, “We urge our friends, in the shale basins of North America to take this shared responsibility with all seriousness it deserves, as one of the key lessons learnt from the current unique supply-driven cycle.”

Shale Producers Are Not A Cartel

But the U.S. oil industry is nothing like OPEC. In 2016, the 14 member countries of OPEC produced nearly 43% of the world’s oil. The cartel also controls 71.5% of the world’s oil reserves.

In comparison, the U.S. produced 13.4% of the world’s oil last year. That’s significantly more than any OPEC member except Saudi Arabia, but there are thousands of companies, each acting in its self-interest, responsible for U.S. oil production. In Saudi Arabia, one company — Saudi Aramco — was responsible for as much production as all U.S. producers combined.

Each of the U.S. producers acting individually can only impact a fraction of a percentage of the world oil market. Without significant collusion, U.S. oil producers just can’t affect the global oil balance in the way OPEC seems to think they can.

Yes, by increasing production — particularly shale oil production — the U.S. has added to the global oil glut. But there is no mechanism by which they can (legally) restrict production to benefit all producers. Production restrictions in the U.S. are a function of the collective decisions of those thousands of oil producers, based on their outlook for oil prices.