Profound Shift in Global Oil Markets

Demand for oil is no longer the dominant factor in the worldwide oil market. According to energy analyst and Pulitzer Prize winner Daniel Yergin, “… the surge in U.S. oil production, bolstered by additional new supply from Canada, is decisive.”

Writing in The Wall Street Journal, Yergin notes that Thursday’s decision by OPEC to maintain current production follows on the heels of several years of changing dynamics:

For the past three years, oil prices hovered around $100 a barrel as disruptions in Libya, South Sudan and elsewhere, and sanctions on Iranian exports, eerily balanced out the production increases from the U.S. and Canada. But the slower global economic growth that became apparent a few months ago was accompanied by weaker demand for oil, just when Libya suddenly quadrupled output to almost a million barrels a day. The result: Prices weakened in September and then tumbled.

With oil hovering in the $70 a barrel range, many are wondering if OPEC hopes to force U.S. producers to shut in wells with high per-barrel production costs. Not so fast, says Yergin.

It is now clear that the new U.S. production is more resilient than anticipated. There has been a widespread view that at around $85 or $90 a barrel extracting “tight” oil from shale would no longer be economical. However, a new IHS analysis based on individual well data finds that 80% of new tight-oil production in 2015 would be economic between $50 and $69 a barrel. And companies will continue to improve technology and drive down costs.