Shed a tear for OPEC
Some readers are old enough to recall sitting in endless lines at the gas station during the 1973-74 OPEC oil embargo. More than just an inconvenience, the decision by the cartel to withhold crude oil supplies to the United States led to a quadrupling of prices over the next six months, and was the proximate cause of the 1974 recession. Likewise in 1980. For the next 35 years, American economic and geopolitical security was inextricably married to production decisions made by oil ministers half a world away.
Today we are witnessing the demise of OPEC as the major driving force in global oil prices, thanks to a technological revolution in North American production. After four decades of the OPEC cartel inflicting pain on the West, the shoe is now on the other foot.
The word cartel derives from the Italian cartello, a letter of defiance. Members of a cartel sign a letter or agreement to collude on production and pricing decisions so as to artificially raise the price of the products they produce. The Organization of Petroleum Exporting Countries was established in 1960 as a cartel designed to exercise increased control over the greatest reserves of crude oil on the planet.
OPEC has proven in the past to be one of the most successful large-scale cartels in history owing to its significant aggregate control of a majority of the world’s proved reserves and production of crude oil.
In 2006, as U.S. production fell to record lows, domestic consumption depended heavily on imported oil, from OPEC as well as Mexico and Canada. Prices for crude eventually closed in on $150 per barrel, choking off economic growth and exacerbating the impending global recession. Then something remarkable happened.
Thanks to an innovation called hydraulic fracturing, U.S. domestic production of oil and gas has doubled since 2006. Amazingly, the United States reclaimed the title of world’s largest oil producer in 2016, surpassing both Russia and Saudi Arabia. And the potential for future gains continues to increase as new fields are discovered and methods improve. Talk about a game changer.
One under-appreciated but powerful benefit of the American energy revolution is the dramatic reduction in the share of our trade deficit owing to imported oil. During the period of peak imports in 2008, the United States imported $386 billion more in petroleum product than we exported. That accounted for nearly one half of our total trade deficit, and at the time it looked likely to worsen. Fast forward to 2016: net imports fell to just $56 billion, and made up just 7 percent of our trade deficit. That is truly remarkable and was totally unexpected just 10 short years ago.
And get this. According to the U.S. Energy Information Agency, we will become a net exporter of petroleum products no later than 2025, just eight years from now. Could you imagine, sitting in your car and stewing in the gas lines in 1974 or 1980, that America would literally become energy independent in your lifetime? It’s now just around the corner.
For OPEC, the resurgence of North American supply is causing real pain. Saudi Arabia derives 87 percent of its revenue and 46 percent of GDP from energy exports. A 20 percent budget surplus in 2008 has morphed into a 17 percent deficit last year, forcing the Monarchy to institute new taxation and to contemplate selling off part of its massive state-controlled oil company, ARAMCO.
But most significantly for Americans, the specter of the cartel choking off supply and crippling the US economy is now a distant memory. Who would have thunk it?
Christopher A. Hopkins