By Chris Faulkner
Crude oil prices are down 40 percent in recent months. There's a surplus of two million barrels being pumped each day. Estimates are that demand for oil will fall in 2015.
And yet in the face of all this, the Organization of the Petroleum Exporting Countries (OPEC) is holding its oil production steady. So far, the 12 OPEC countries appear willing to absorb huge losses in the hope that plummeting prices will make U.S. shale oil extraction unprofitable. If it can squeeze out some U.S. producers, OPEC hopes to regain its dominance and force the United States back into foreign oil dependence.
The United States has an effective potential countermove:
Congress should lift the 40-year ban on exporting crude oil and keep U.S. producers in the game.
OPEC has good reason to feel threatened. The U.S oil business is experiencing an unprecedented production boom thanks to hydraulic fracturing, or fracking. According to the Energy Information Administration (EIA), U.S. oil production has risen to 9.08 million barrels a day - its highest level in more than 30 years.
The United States has already overtaken Saudi Arabia, OPEC's dominant member, as the world's largest producer of petroleum liquids - which includes natural gas - according to the International Energy Agency. In the last three years, oil and gas production has grown faster here than in any other country in history. This energy boom has revitalized America's economy, supporting more than two million jobs and contributing $283 billion to U.S. gross domestic product.
OPEC's decision to send oil prices tumbling was designed to reverse these gains. As Saudi Oil Minister Ali Ibrahim Naimi said after OPEC met in November, the international cartel "provided an answer" to the U.S. shale industry.
Lower oil prices have certainly affected American shale producers.
Fracking is more expensive than conventional oil drilling. Consequently, as oil prices fall, producers will be forced to scale back. In the Bakken formation in North Dakota, some producers need a price of at least $65 a barrel to break even. Other producers in Texas and Oklahoma have been losing money since oil dropped below $75. Last Monday, U.S. oil prices were $55.91, the lowest price since mid-2009.
Big energy companies are already trimming costs. ConocoPhillips recently announced plans to slash investment spending by 20 percent next year. Halliburton, the world's second-largest oil field services company, just announced layoffs.
But OPEC may be underestimating the tenacity of American producers.
The IEA has concluded that most shale oil from the Bakken formation is profitable at just $42 a barrel. A recent study from IHS, a consulting firm, concluded that 80 percent of American shale oil can be profitable between $50 and $69 per barrel. Plus, as producers continue to innovate, extraction costs will drop.
Let's not forget that OPEC is vulnerable to its own policy. Although the International Monetary Fund found that Kuwait, Qatar, and the United Arab Emirates can balance their budgets with oil at about $70 a barrel, the same cannot be said for the nine other members of OPEC. Venezuela and Nigeria need $120 to get by, while Iran needs $136 - more than twice Monday's price.
Indeed, once one considers rising production and decreasing demand across the globe, OPEC's move looks suicidal. Bank of America called the cartel "effectively dissolved."
As oil prices continue to slide, the question is who will fold first: OPEC or the U.S. shale industry? That could depend on Congress.
In 1975, Congress banned the export of U.S. crude oil in response to the Arab oil embargo. With oil prices skyrocketing, Congress sought to protect America from price shocks by keeping oil at home. Today, that restriction doesn't make sense. There's no longer a shortage of oil.
The ability to export American crude oil across the world would ensure that U.S. shale producers can afford to stay in the oil game. Even if the margins are low, revenue from new international markets would allow them to keep drilling and compete for a share of the world market.
Exports wouldn't hurt American consumers. A recent analysis by the EIA found that domestic gas prices are directly tied to international crude prices. So exports would not raise prices at home.
OPEC thinks it can squash America's shale oil industry. With the right export policies, however, the United States can win this price war and solidify its place as an exporter, not just importer, in the global oil market.