Abstract

Its first time after the 2008 crisis when the Crude oil Price has declined so much. Crude oil prices have declined to $47 per barrel in the past Quarter making it difficult for the producers to continue same level of production.

Many theories have come into effect relating to the reasons of fall in prices, disadvantage for Oil producers, adverse effects on economies etc.

But, can you imagine that it may be Advantageous for Some. Just think once, In my Opinion it is little bit Advantageous to OPEC nations & Other Oil exporting countries whose primary revenue is from Export of crude oil. It must be sounding a little bit foolish but take a look on this view too.

In general people must be thinking that it must be horrific time for oil exporting countries since there revenue must have fallen, its true, but, there are always two sides of a coin.

Shale oil Revolution

We are all familiar with the shale oil revolution in United States (US) which has led to a fall in demand of Crude oil. US, which was a leading oil consumer has now become self sufficient in oil production and would had join the race of exporting oil but, the fall in crude oil prices have shattered the dreams of self sufficiency, since the Current Rate of oil couldn’t fetch the US shale oil drillers their cost.

Cost of Production of Shale Drillers

Shale oil is costly to haul out and only viable at high-enough prices, Ed Morse, Citigroup Inc.’s head of global commodities research in New York, said by phone Sept. 23. Extracting oil from shale formations costs $50 to $100 a barrel to produce, compared with $10 to $25 a barrel for conventional supplies from the Middle East and North Africa, the Paris-based International Energy Agency estimates.

(http://www.bloomberg.com/news/2014-10-07/shale-boom-tested-as-sub-90-oil-threatens-u-s-drillers.html#)

Thus, making it impossible for shale drillers to continue their production

Cost of production to Crude oil

Lifting Costs Finding Costs Total Upstream Costs
United States Average $12.18 $21.58 $33.76
    On-shore $12.73 $18.65 $31.38
    Off-shore $10.09 $41.51 $51.60
All Other Countries Average $9.95 $15.13 $25.08
    Canada $12.69 $12.07 $24.76
    Africa $10.31 $35.01 $45.32
    Middle East $9.89 $6.99 $16.88
    Central & South America $6.21 $20.43 $26.64

Source: – http://www.eia.gov/tools/faqs/faq.cfm?id=367&t=6

It’s quite obvious from the above comparisons that at the current price level US shale oil drillers couldn’t continue to compete. This was also seen in the decision of OPEC members not to cut supply, this decision sent oil prices plunging..Although the decision was to sustain their market share but unknowingly it became a back breaker for Shale drillers.

Current scenario must be very chaotic but, it will only lead to future benefit for Crude exporters.

(Written by- Arindam Shukla, Arindam.shukla@gmail.com – Currently working with RPMD & Associates)

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0 responses to “Falling Crude Prices – Hidden advantage to OPEC”

  1. Rahul Jain says:

    Good work arindam. look forward for more from you.

  2. Vinod says:

    It is a good analysis and makes a lot of sense. Let us take it a step further. The capital investment in Shale Gas has largely been already done. In current environment US may not invest further. However the banks and the institutions that funded the shale gas investment is directly or indirectly coming from the buyers of US Sovereign bonds. The Arabs, Chinese, etc. all invest in US. If US loses, they tend to loose. Secondly, if dollar falls they again tend to get effected.

    Having said that, still OPEC don’t want US to give them competition, therefore OPEC nations have decided to support fall in Oil price and have not reduced the supply. It is a tricky situation. Consumer is benefiting but investment is affected. This may not continue for long, however, the oil price cannot come back to above $100 rate as US is not importing anymore.

  3. Christy says:

    Your opinion is ok but why are you so apologetic about it ? words like “little bit foolish” in the article makes you look very defensive.

    Dont be so worried in giving your opinion- right or wrong it is just a thought and worth debating.

  4. K.MUTHU says:

    What is the cost of production of Crude Oil in INDIA.Please furnish that also so that we could assess the future of Oil explorers in INDIA like ONGC,Oil India ,Cairns,RIL etc.

  5. A RAVINDRAN says:

    Shale oil invention and commercial production is one of the greatest thing done to human kind by American people in the near future. I am not sure whether the cost of production of Shale oil in US given here, has taken into account vast quantity of the reserve found, which ensures sustainability of the production for a longer period of time. If you spread your cost of finding for that much of time, I am sure Shale oil production in US must be cheaper than what is given here.

    Even if we assume the costing is right,Self sufficient theory is still valid since US is not buying oil from outside.

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