Shed a tear for OPEC

Chattanooga Times Free Press - - BUSINESS - Christo­pher A. Hop­kins, CFA, is a vice pres­i­dent and port­fo­lio man­ager for Bar­nett In­vest­ment Ad­vi­sors in Chat­tanooga.

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

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