Oil Supply: Who’s in Charge?
“The study of how people allocate a limited number of resources to satisfy an unlimited number of wants.” That’s the definition Dr. Coronado taught me back on the first day of Econ 209, Macroeconomics, and I’ve done my best not to forget it. Resources and Wants, Supply and Demand – it’s the most basic and important concept in all of economic study. The price of crude oil is volatile and subject to everything from political turmoil to holiday travel plans, but today, I want to step back from the news cycle and focus on one of those basics – supply.
The Middle East has long been in the proverbial driver’s seat when it comes to global oil production. An abundance of reserves, superior cost per barrel, and the power of OPEC have made it difficult for North American drillers to compete. But sustained higher oil prices and technology improvements throughout the 2000s and early 2010s allowed North American producers to get a foot in the door. While oil production growth in the region was flat for the 15 years from 1995 to 2009, growth since then has convincingly outpaced the global average.
It’s certainly harder for the rest of the world to grow a much larger production number on a percentage basis, but this phenomenon goes beyond percentages. Compare the cumulative growth in barrels per day. North America represents only a quarter of global supply, yet over the last 10 years has added more production capacity than the other 75% combined.
When oil prices collapsed in 2014, many high cost drillers were forced to close up shop, but the North American shale revolution proved more resilient than almost everyone expected. The most efficient rigs remained in operation, and their efficiency has more than offset the decline in active rigs. U.S. oil production is at all-time highs.
OPEC now finds itself in a precarious situation. Oil prices are well off their 2016 lows, due in part to a coordinated supply reduction by member states, but the costs of producing below capacity has many governments in tight financial positions. They’ll decide more about their production plans at a meeting later this month. Meanwhile, recent oil tanker attacks near the Strait of Hormuz had a surprisingly marginal impact on prices. That came only weeks after Iran threatened to close the Strait entirely. It’s hard to believe that tensions in a region that produces 30% of the world’s oil (and controls a highway that transports 40% of all seaborne crude) wouldn’t dramatically affect oil prices, but the dynamics of global supply have changed quite a bit in the last 10 years. A powerful new player has emerged. To be sure, the Middle East is still in the driver’s seat, but North American producers are on the passenger side and reaching for the steering wheel.
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