OPEC Cuts: Not Bad for Drivers, Good for Texas Shale Producers

Today's decision by Russia and OPEC to pull a relatively small amount of crude oil off the market is seen as good news for the Texas shale oil industry, and not a major blow to drivers, News Radio 1200 WOAI reports.

The second and third largest oil producers in the world, Russia and Saudi Arabia, which are the only voice in the crumbling OPEC cartel that matters, say they will cut production by 1.2 million barrels a day, as a way to stop the plummeting price of crude oil.  Since reaching its high in early October, oil prices have fallen by more than 20%, the fastest two month drop since markets began trading crude oil as a commodity.

UTSA economist Tom Tunstall, who studies the economy of Texas shale production, says, ironically, the countries may have just thrown a lifeline to their biggest competitor.  He says as prices were poised to fall below $50 a barrel, there was a concern among Texas shale producers that another 2016 was underway, and prices may fall so low they could not break even on their production.

"Barring a development like this, it is quite likely that we would have seen global oil prices continue to drop," Tunstall said.

And, he says today's move provides an opening for Texas shale to increase its market share at OPEC's expense.

"By cutting production, Russia and Saudi Arabia are in essence ceding market share to other producers, the lion's share of which are in Texas."

And, he says with the oversupply of oil which is on the market today, this decision will not be a blow to drivers.  He says while it will probably stop the downward march of oil prices and maybe push pump prices up slightly, it should not lead to a situation where prices will rise sharply.

Today's decision shows the major problems facing the once-mighty cartel, now that its main rival the United States has surpassed both Saudi Arabia and Russia to become the world's largest producer.  Most of the OPEC nations desperately need higher prices to balance their budgets, and pay for the social programs which, in many cases, prevent their governments from being overthrown.

But OPEC clearly realizes that this isn't 1974 any more.  U.S. oil imports have fallen to their lowest level in decades, and, last week, for the first time since the 1940s, the U.S. actually exported more crude oil than it imported.

So OPEC realizes that if it cuts production any more than the relatively small 1.2 million barrels announced today (by comparison, the U.S. this year is producing 14 million barrels a day) it risks ceding even more market share to Texas shale, which is poised to ramp up production even more in 2019.

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