U.S. Oil Industry at Odds Over OPEC’s Pricing Power

Producers and policymakers are debating the need for action at this week’s summit.

AP Photo/Gregory Bull
Brian Dabbs
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Brian Dabbs
June 21, 2018, 12:30 p.m.

A debate is raging over potential OPEC moves to retool oil production just hours ahead of a heavily anticipated and likely contentious cartel summit Friday in Vienna—and that back-and-forth appears to be pitting some traditional U.S. partners against each other.

The American Petroleum Institute, the top representative of U.S. producers, is downplaying the need for a deal to boost production, while a key member of the group is arguing that OPEC action is necessary to stave off crisis.

More oil is likely needed globally in the coming months to offset OPEC’s supply challenges due to instability in Libya and Venezuela and the looming renewal of U.S. sanctions against Iran. Less oil on the global market typically leads to higher prices. That’s where the discord sets in.

Pioneer Natural Resources Chairman Scott Sheffield, whose firm is a member of API, is urging OPEC to produce more to avoid a price boom and keep demand for oil high.

“One hundred dollars isn’t going to help OPEC. It’s not going to help us in West Texas,” Sheffield said in Vienna, according to reports. “It will hurt demand. It will move investment to alternative energy around the world.”

A barrel of U.S. crude oil currently sells for roughly $66. That’s a relative sweet spot, according to analysts and producers. A sharp rise in price would likely slash demand, and a more-than-modest price decrease would disincentivize investment.

But Dean Foreman, the API’s chief economist, argues that U.S. producers likely can step in to fill the void.

“To the extent that OPEC is suffering and needs to open the spigots a bit more, the U.S. has been compensating for the loss in certain OPEC production,” Foreman told National Journal. “U.S. production has moved forward in such a way that the United States has gained market share on a global basis.” Foreman cautioned that individual producers need to make their own decisions on production.

U.S. crude production now totals 10.9 million barrels per day, according to the Energy Department’s chief statistics arm. And the country is exporting roughly two million barrels of crude daily, according to analysts, just two-and-a-half years after former President Obama lifted a ban on crude exports.

Meanwhile, serious kitchen table issues are at stake.

More OPEC and Russian production would cut gas prices at the pump for Americans. U.S. oil producers also want to maintain stable prices to preserve an ongoing U.S. fossil fuel renaissance.

And the debate isn’t steering clear of politics.

Just six months ago, a barrel of U.S. crude sold for roughly $58, and Americans paid much less at the pump. Democrats continue to chide President Trump for allowing prices to rise, and Senate Minority Leader Chuck Schumer, along with other Senate Democrats, last month called on the president to pressure OPEC to increase production.

Trump then took to Twitter on June 13 to scold the cartel. “Oil prices are too high, OPEC is at it again. Not good!,” he wrote.

But some of Trump’s key allies on Capitol Hill are hitting back against that pressure, echoing Foreman’s position instead.

“[OPEC] can do whatever they want to do. If they want to restrict their production, thank you very much. If they want to increase their production, we’ll outcompete them,” said Rep. Joe Barton, a member of the Texas delegation and former chairman of the House Energy and Commerce Committee. “The market is now the limiting factor. It’s not the OPEC oil ministers. They’ve lost the ability to set the price based on what they decide.”

Barton spearheaded legislation during the 113th Congress that lifted the 40-year crude-oil export ban.

Most analysts and producers now say the shale fracking revolution in the U.S. is changing the global game. Shale producers, who drill in the vast Permian, Eagle Ford and Bakken basins, can more easily turn the spigot on and off compared to traditional producers, and therefore are more attractive to global customers, according to analysts.

“The country that is being able to react the most to increases in demand, that has the most ability to grow production, would be the U.S.,” said Trip Rodgers, an investment advisor at BP Capital Fund Advisors, an energy firm. “You are seeing countries sign more deals with U.S. companies.”

Shale producers do, however, face pipeline constraints that could impede growth in both production and exports.

“What they have to worry about are problems much closer to home, and that is inadequate takeaway capacity and bottlenecks and that type of thing,” Bob McNally, president of energy and geopolitical consultancy Rapidan Energy Group, told National Journal before departing to Vienna.

Republicans on Capitol Hill have put forth a range of measures to expedite pipeline approvals, but those face a tough path to the president’s desk.

And in Vienna, the situation is still fluid.

The Saudis, the de facto head of OPEC, and Russia agreed roughly 18 months ago to keep production in check, and that relationship has held—a surprise to many industry experts. But both countries have already been modestly increasing production.

Iran, meanwhile, has hit back against proposals to boost production. That country’s oil minister has criticized Trump for imposing sanctions on two OPEC countries, Iran and Venezuela, while still urging the cartel to lower prices.

“OPEC is an independent organization, and it’s not an American organization,” Iranian Oil Minister Bijan Zanganeh told reporters in Vienna. “OPEC is not a part of the Department of Energy of the United States.”

On Thursday, Saudi Energy Minister Khalid al-Falih said the country is targeting an increase of 1 million barrels per day. The negotiations are delicate.

“There’s a fine needle to thread of making sure that you signal that OPEC stands ready to supply the market if that is needed as market conditions change,” Jason Bordoff, a former senior energy adviser to President Obama, who is also in Vienna, told National Journal, “and then at the same time trying to build consensus if you can because countries like Iran are not going to be eager to put more supply on the market.”

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