At the conclusion of its November 2014 meeting, OPEC, led by de facto swing producer Saudi Arabia, went against decades of historical precedent and initiated a global price war. The price of oil tumbled from June 2014 highs of over $110 per barrel (bbl) to less than $50/bbl in January 2015. Prices fell as low as the mid $20s in January 2016. Saudi Arabia, in fact, flooded the market using spare production capacity even as prices were dropping—increasing output from 9.6 million barrels per day (mbd) in November 2014 to 10.2 mbd in March 2015. Oil price volatility increased dramatically as a result, hitting levels in early 2016 last seen in the wake of the 2008-9 financial crisis.
The strategy aims to use an extended period of extremely low oil prices to structurally rebalance the oil market on terms that will benefit OPEC and other large global oil exporters. Their goal is to return the market to a condition of relative short-term scarcity in which sellers have substantial leverage over buyers, thereby maximizing OPEC’s ability to manipulate prices and extract large resource rents from oil consumers across the globe.
The strategy has four main components: (1) recapture short-term market share from U.S. shale an other responsive sources of global supply; (2) undermine investment in capital-intensive, long-term, non-OPEC oil supplies such as global deepwater resources and Canadian oil sands; (3) stimulate short-term oil demand through low prices; and (4) undercut global policy to reduce oil consumption, including fuel economy standards, as well as competition to oil, such as electricity and natural gas. There is compelling evidence that all four components are already succeeding.
U.S. Supply Impact: Since peaking in October 2014 at more than 1,600, the number of active oil drilling rigs operating in the United States has plummeted 78 percent to about 340 today. Low oil prices have triggered a wave of more than 100,000 layoffs and dozens of bankruptcies in the U.S. oil industry, production has declined and the country’s exposure to less stable oil imports has increased. The price collapse has seen private investment in new production capacity suffer, with over $380 billion in global deferred capital expenditures (as of January 2016), equivalent to 27 billion barrels of oil.
U.S. Demand Impact: In part due to lower gasoline prices, U.S. vehicle miles traveled (VMT) is expected to exceed 3.2 trillion miles in 2016, an all-time record. Sales of SUVs in the United States have also skyrocketed, increasing 13 percent year-over-year in 2015. Sales of smaller, more efficient cars are suffering, and in 2015 the average fuel economy rating of new light-duty vehicle sales posted its first decline in years. Lower oil prices have also prompted automakers to pressure regulators to loosen federal fuel economy standards, potentially threatening the mid-term review of the 2009 CAFE standards and creating a significant setback for fuel efficiency and advanced fuel vehicles.