Fracking has largely managed to hamstring OPEC

If you were doing any traveling over Thanksgiving you may have noticed that it cost less to fill up your tank. And not a little bit less either. Gas prices have dropped as much as thirty cents per gallon or more in many parts of the country just in the past few weeks. But what you’re seeing is only one piece of a much larger puzzle. The price of oil reaching our refineries has been tanking, which is great news for you, but not so great for the oil and gas industry.

As pointed out this week, it all comes down to fracking and the impact that’s had on domestic supplies. But it’s not just in the US where this effect is being felt. The surge in American exports has taken OPEC by surprise to the point where they may be heading toward Walking Dead status.

The river of oil now hitting the market from U.S. fracking has stunned global energy markets. The U.S. has already leapfrogged both Russia and Saudi Arabia as the No. 1 producer. Will U.S. oil lead to OPEC’s demise?

For the first time since World War II, the U.S. is on the verge of being a net oil exporter — something that, just five years ago, would have been considered impossible.

This, of course, has caught the 28-nation Organization of Petroleum Exporting Countries by surprise. Even just a few years ago, the consensus was that fracking and its related technologies would add a decent amount of oil to the market, but nothing like what’s happening now.

Original predictions about fracking were that it would produce some petroleum to add to our crude oil supply, but a lot of the total energy production would involve natural gas and other products. When you add them all together, the US has already become a net energy exporter, producing a lot of pressure on countries like Russia and Saudi Arabia. But now we’re quickly approaching the point that we’ll be a net petroleum exporter in the next few years. (Express-News)

The United States could become a net exporter of petroleum in less than five years, the first time the country would achieve such a feat since at least 1949, according to a new report.

The shift from importer to exporter is driven by the surge in U.S. oil production that has followed the unlocking of crude reserves from shale formations, according to the report by the research firm IHS Markit. U.S. oil production grew to 9.4 million barrels a day in 2017, nearly double the 5.1 million barrels a day produced a decade earlier. Since then production has only accelerated: the Energy Department last week estimated that U.S. output has reached 11.7 million barrels a day.

This is what’s driving a stake through the heart of the former dominance enjoyed by Russia, Saudi Arabia and the rest of OPEC. It’s not just a question of total numbers of barrels or prices at the pumps. What we’re witnessing represents a significant shift in leverage and power in the global markets which impacts the entire international power dynamic.

Of course, this sort of expansion comes with a downside as well. US energy corporations have had to scale back production in order to avoid creating a glut which could bankrupt them. The Wall Street Journal has a good analysis of this effect and how producers are managing this balancing act. (Subscription required)

Production hedges are protecting US shale drillers from plummeting oil prices for now, but the situation may reverse next year when many of the hedging contracts are set to expire, potentially forcing producers to adjust budgets and revise growth plans. US drillers have hedged around 25% of their 2019 production, compared with 45% in 2018, reports Wood Mackenzie.

There was a time when OPEC could threaten us and destabilize the global economy just by cutting production or threatening to shut down some shipping lanes for a few weeks. Those days are over. The United States is poised to be the dominant energy supplier across multiple product families in the very near future. And you can bet that the folks in Saudi Arabia and other former oil giants have taken notice.