Blog Post

American Oil Producers vs OPEC: What Goes Down Will Come Up

Jan 4, 2016 | Alan J. Krupnick

It took $35 per barrel to get a reaction from US oil producers, but Saudi Arabia is finally seeing its ramped up production force drilling cutbacks in the United States. This success, however, is likely to be short-lived.

Many analysts have reported that the Organization of Petroleum Exporting Countries (OPEC)—the Saudis notable among them—have responded to the shale revolution in America by upping oil production. The intention is to drive down profits, forcing many American producers out of the oil fields, and increasing market share. 

However, here is why American production stands a good chance of enduring this challenge: 

US oil producers surprised even themselves with their ability to survive by squeezing cost savings out of their production and whittling their drilling sites to all but the most promising.

Continued low prices are causing much pain among other oil producers, even Saudi Arabia. But, more importantly, even small increases in prices are likely to lead to large increases in US production.

As economists would say, the fracking revolution has increased the elasticity of supply. This revolution features, for instance, multiple wells on a pad. Thus it is cheap and quick to drill another well when the price is right.  

Furthermore, technological change has cut drilling and fracking times to well under a month. And with gas and oil both cheap and rigs going begging, it will be easy to obtain rigs if oil prices rise.  

As for the shakeup in the industry—some of the smaller players are declaring bankruptcy—the leases will be bought by others or obtained through merger, becoming available for exploitation quickly. If there is any stickiness to increasing production, it will probably be around labor supply. A prolonged bust in North Dakota could shrink the labor supply there, slowing a re-start. Yet, as long as wages in the US economy are in the doldrums, labor could quickly move back.

Ultimately, Saudi Arabia's plan to increase its market share may be defeated by the fracking revolution.