OPEC announced today that it will maintain its current levels of production. As expected this has further suppressed market prices with both Brent and NY prices hovering around USD70 mark. This is a four year low and let’s bear in mind its not that long since OPEC were saying USD100 a barrel was a sustainable price level for the longer term.
So what happened? The answer- shale oil. What OPEC hadn’t factored into it’s earlier assessment of oil at USD100 is that consistently holding this pricing level makes shale oil extraction financially viable in many jurisdictions. This pricing aspect accelerated the development of new extraction techniques and – to put it bluntly – OPECs greed created a new, sophisticated and directly competitive market sector.
Arguably, OPEC’s most recent strategy to flood the market with ‘cheaper’ oil at a considerably reduced price is an attempt to slow down the pace of development of shale oil extraction. But perhaps the genie is already out of the bottle. The shale oil sector is now well established and as can be seen from the graphic below long term lower oil prices will cause significant pain for some of OPECs largest member states. Another complication. For further background details see the BBC website link below. Read more here on BBC news.