Sunday, August 16, 2015

OPEC's Demise and the U.S.'s Rise in Energy Policy

A year earlier, crude oil analysts would have never believed in a bear market with spot prices dropping to almost $40 a barrel less than half the 2014 price. No, before the fracking revolution in North America, analysts knew an era of slippery market economics controlled by an oil cartel that controlled a third of the world's oil supply. But they weren't a cartel, they were a faucet that chose its own flow in order to manipulate profits in their favor. So they were a cartel and analysts and oilmen and their corporations played it like they were. They, the men behind the fracking glut, saw it as an inevitability, a process of technology that pushed peak oil off into the future. OPEC responded in a different way. To them, fracking was just a threat to their market share from a country that used to be their favorite customer. When prices started to drop in mid-2014, onlookers waited for OPEC to preserve their profitable margins and reduce production as they had done before, but instead a war for market share ensued. Production remained unhindered and prices dropped just as it should in an oversaturated market. Some would call it a small slump until the return to higher prices, but others would label it a new era. The flood of fracking oil in the market quickly transformed the United States into a major producer despite whispers of waning oil capacity in the Texas basins.

With U.S. production nearing 10 million barrels a day while accounting for an almost equal amount of global demand, the country has taken hold of energy policy in its own borders as well as outside it for the upcoming decade where policy relating to energy sources will require rethinking. As an awkward hybrid of an oil exporting and importing economy takes shape, the United States with its power in foreign investment has the potential to dominate the market in green energy. So what? This was inevitable right? Not exactly. The instability of crude oil has created large amounts of speculation for its future, especially as it emerges onto a free, unhindered market. OPEC's inability to control the market has diminished their role to agents in the chemical reaction of supply and demand that is the oil market.WTI and Brent will quickly close the spread as more U.S. oil is introduced to the global market following the lifting of bans on imports. Crude oil will never recover to its immense prices until a true demand and supply instability tilts them that way. Instead, petroleum will remain a cheap commodity until reserves are used up. Meanwhile, energy firms with heavy investments in crude oil rigs and wells will have to reinvest into nonrenewable sources that will bring in more profits.The oil giants will talk about mergers and acquisitions of smaller, technological companies in order to combine capital and new intellectual property. Investors will slowly offload energy investments during this time as the technology sector will burst with its new association with the energy sector. Until then, the North Sea basins will be strained until emptied with new investment being reserved for North America and Africa. The Brent benchmark will slowly become less important as the WTI price will take on its role as the international benchmark. It's a new era. One that will not be determined by OPEC's meetings. Even talks of an OPEC emergency meeting this year have barely phased investors who know that countries rarely acknowledge the policies of their cohorts. In reality, the oil cartel cannot effectively control Iran coming back onto the market or make up for the 1 million barrel increase in production after only a year in the United States. Instead, demand and supply projections from the United States Energy Administration and the International Energy Agency will weigh in on a market sensitive to speculation, something that wasn't possible during the reign of OPEC.


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