As Megan McArdle noted on Wednesday, fracking in the US is causing dissension within OPEC; couldn’t happen to a nicer bunch of cartel members. Megan’s analysis is dead on, well worth reading, and reveals how different the ideal strategies are of the different OPEC members.
At some level, this is not new — Saudi Arabia has been the low-cost producer for decades, and they have been the dominant party in OPEC due to their low costs and plentiful reserves. At the margin, the increase in US oil supplies due to shale oil will first displace higher cost suppliers in OPEC, who can’t afford the price decreases that may accompany US shale oil and that Saudi Arabia will be able to withstand for longer.
Building on that observation, here’s a video clip of Deloitte’s Branko Terzic (with whom I’ve had the pleasure of working in the past on some electricity restructuring efforts) analyzing the effects of increased US oil supplies on the global market and on OPEC’s production and pricing strategies.
Branko notes that Saudi Arabia is still a swing supplier in the global oil market, and at least for now, they retain some market power and ability to move price by changing their production. How long that power persists remains to be seen.