Implications of lower gas prices: Are they really good for America?

Implications of lower gas prices: Are they really good for America?

WASHINGTON, November 30, 2014 — OPEC’s decision at its November 27 meeting not to cut production has led U.S. gas prices to plummet, and experts say they will remain low for at least another year. However, lower petroleum prices could threaten America’s booming oil industry, undercut alternative energy research, and raise oil use.

The decision by Organization of the Petroleum Exporting Countries (OPEC) also reflects increased divisions in the cartel, especially between Saudi Arabia and Iran. Lower prices will likely slow Iran’s economic recovery and hurt smaller players like Venezuela. Russia will also suffer from the move.

Saudi Arabia is likely to weather the oil-price storm, although its strategy to disrupt the U.S. industry is risky and could backfire.

Following its 166 meeting, OPEC announced on November 27that it would not alter its current oil production. The press release noted “concern over the rapid decline in oil prices in recent months” but said, “in the interest of restoring market equilibrium, the Conference decided to maintain the production level of 30.0 mb/d, as was agreed in December 2011.”

OPEC accounts for over a third of all oil output, and global oil prices rise and fall based on the tightening or loosening of supplies from the cartel.

Saudi Arabia had pushed for a status quo in oil exports and hailed the result, with Saudi Oil Minister Ali al-Naimi calling it “a great decision.”

Iran, Algeria and Venezuela, which are generally more hawkish concerning oil prices, had hoped for cuts in production to push oil prices higher. Algeria and Venezuela lobbied the organization to cut 2 million barrels per day during the five-hour meeting.

The lower prices are already hurting weaker producers like Venezuela and Iran, which had counted on higher prices to help boost failing economies.

Smaller producers have little ability to make cuts on their own, because they would have little impact against massive producers like Saudi Arabia.

Venezuelan Foreign Minister Rafael Ramirez said he accepted the decision, but that he was disappointed. He noted, however, that he hoped lower global prices from OPEC would discourage buyers from purchasing more expensive U.S. shale oil. This reflects comments from other OPEC producers, who believe that lower OPEC oil prices now will not only make U.S.-produced oil less attractive, but also undercut the entire U.S. oil market and force some nascent U.S. shale companies out of business. That will position OPEC to dominate the oil market in the long term.

And therein lies the rub.

While Americans are thankful for lower oil prices now, the cost could mean continued foreign-energy reliance later.

Saudi Arabia is a savvy producer, and is eyeing advances in U.S. oil production warily. If U.S. shale oil production explodes and the country begins exporting oil, OPEC could face serious competition for market share. Washington has already lifted some restrictions on selling U.S.-produced oil, and Saudi Arabia does not want to risk losing market share to America.

Naimi warned OPEC countries that by undermining the profitability of U.S. producers, they can force some companies out of business and limit the activities of others.

If U.S. shale exploration falters, the U.S. would likely revert to reliance on OPEC.

However, it is unclear whether OPEC’s policies will succeed. Brent crude oil stabilized at $73 a barrel last Friday, after reaching a low of $71.12. Oil experts now predict that prices will average between $70 and $75 per barrel throughout 2015, although it is possible it could dip even into the $68 range.

The Saudi’s believe this will make U.S. shale projects far less attractive. The International Energy Agency estimates that about 4% of U.S. shale prices need oil to stay at $80 a barrel to make a profit. However, some projects require only about $42 a barrel for success, while most fall somewhere in between.

U.S. producers, so far, say they will stay the course and continue North American exploration even if prices fall. They also understand that OPEC is playing a short-term game and that, ultimately, it will have to raise prices.

In the meantime, the Cartel itself is likely to suffer discontent. Saudi Arabia is well-positioned to withstand the temporary downturn, thanks to massive currency reserves. Iran, however, is already facing economic difficulties, and had planned on seeing higher oil prices to help it recover from years of sanctions and downturn. Iran and Saudi Arabia are already locked in a Sunni-Shiite proxy war across the Middle East, and Saudi’s dominance in OPEC will only increase strains. Iran needs oil prices in excess of $100 per barrel to balance its budget, and the lower prices will stretch its already tight budget.

Russia also needs prices over $100 a barrel to meet its 2015 budget. The country, not a member of OPEC, is suffering under Western sanctions thanks to its encroachment in Ukraine, and the lower prices will cause even more difficulties for President Vladimir Putin. Revenue from oil accounts for more than 45% of Russia’s budget, so shortfalls will force Putin to either cut spending or dip into foreign exchange reserves. To avoid losing popularity, Putin is not likely to end spending, so reserves are a likely short term fix.

Another major loser from the OPEC decision is alternative energy producers, who often fall out of favor when oil prices are low. Consumers tend to use more oil when prices are low, and research funding for alternative energy drops. Instead, consumers become giddy over lower prices at the pump and leave their hybrids and electric vehicles in favor of larger, fuel inefficient models.

The question now is whether the Saudi’s will succeed in luring U.S. consumers and undercutting opportunities for American energy self-reliance, or whether OPEC has over played its hand and will lose market share and relevancy to a tenacious U.S. oil industry.

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Lisa M. Ruth
Lisa M. Ruth is Editor-in-Chief of CDN. In addition to her editing and leadership duties, she also writes on international events, intelligence, and other topics. She has worked with CDN as a journalist since 2009. Lisa is also President of CTC International Group, Inc., a research and analysis firm in South Florida, providing actionable intelligence to decisionmakers. She started her career at the CIA, where she won several distinguished awards for her service. She holds an MA in international relations from the University of Virginia, and a BA in international relations from George Mason University. She also serves as Chairman of the Board of Horses Healing Hearts, and is involved with several other charitable organizations, including Habitat for Humanity, The Boys and Girls Clubs of America, and AYSO.