What would happen to OPEC if it won the oil price war

We are living in weird times. OPEC floods the market with crude oil in order to kill off shale as an industry and also to keep Iranians and Russians at bay. The cartel itself is under enormous strain as less wealthy members are in utter disarray and we might even see one of them blow up because of possible financial meltdown.

And the only thing that happens is that shale producers in the US squeeze the bottle harder than anyone has dared to imagine just 2 years ago.

However, this point was given plenty of coverage here. Anyone knowing me just a little bit will know that I believe in shale drillers entrepreneurial juices and that they will come back with a vengeance.

Let’s assume, just for a moment, that things play out very differently. Let’s imagine that OPEC – after a protracted and bloody war with the rest of the world – finally prevails and shale meets an untimely end.

The world goes back its pre-shale state where oil production is dominated by a cartel and some other big producers producing oil from conventional reserves that take 5 years or more to develop. And North American energy independence just goes away like it had never been something that had disturbed our peaceful minds.

I have already said in a post some years ago that easy oil is over and the shale revolution has not changed anything in this opinion of mine. I had also said that although the planet still sits on an awful lot of the black glibber, it’s going to be much harder to produce. Super-deep Sea, Arctic, Sour Oil, Tar sands and Super Heavy crudes – shale would be in that group as well but this special kind is out for the sake of the argument right now.

Hangin by a thread ...

Hangin by a thread …

The problem is that as the worlds energy needs are still massive and rising, we would pump the existing conventional reserves at even higher rates meaning that we will meet depletion of those easy fields much quicker which in turn forces us back onto the hard to find/extract/produce/process oil patch.

This means rising prices which no doubt OPEC and its “familiars” (that’s a term I borrowed from the Blade trilogy) will massively enjoy. At least in the short run as it will patch over their current financial problems.

But the current oil producers problems are not shale or new extraction techniques. It’s not even cheap oil and the oversupplied market. It’s also not even faltering markets as we start to find out the scale of the cumulative financial worldwide Ponzi schemes and what their collapse is going to do to consumption of – anything.

Their problem is their impossibly swollen state administrations, their reckless spending, their unreformed internal markets and their restive populations that have been bought off with largesse from the rulers for far too long. Loads of cash have stymied any hint of reform and reduced oil producing countries into fiefdoms of some strong man with a big wallet. Those countries had more than a decade to fall behind other nations in competitiveness, in entrepreneurialism and in social development. Those others, the consumers of oil suffered high oil prices as they bought the stuff.

Oil producing nations competitiveness sucks, their nonoil products make anyone yawn, their economies are in a “petrodollar hooked” shambles and their populations are coddled to the point where some real entrepreneurialism is always confounded with someone spending big money on big offices with no real business behind.

If high oil prices come back because shale is beaten, those same countries, rulers and societies have it easy to return to their bad old ways and they will further deepen the trench they are already sitting in. Rulers will choose the easy way and keep feeding the Crocodile that will eat them in the end and everyone will play along.

There will even be plenty of economists which will restart praising the superiority of the Petro-economy as opposed to the weaklings from the political west. Riches are just falling into their laps without them even trying and we consumer economies have to labor hard to get results. Clearly they are superior – we had that kind of hogwash multiple times during the high price tide. Remember the hype around the BRICS? Look again today.

Any more of the same and you risk this ...

Any more of the same and you risk this …

But even worse for them the consumer side of the oil business will redouble its efforts to find ways to wean themselves off oil as the cost (both financial and environmental) will be considered crippling which will ring in the true end of the Petro-business-model as we know it in the longer run.

Shale has given the oil business a shot in the arm and a new lease of life as it made oil affordable again and hence allows consuming nations to go easy on oil alternatives. That’s maybe not great news for the Greenies out there but it’s the best that could have happened to OPEC. They might not agree yet.

And as for economic (and other) reform in producing countries – trust me, you will see the benefits of that too – in time. Rome was not built in one day and so will a new energy world take time to build. Your populations might not want to wait that long and they might even less be inclined to shoulder the pain that comes with it. Remember that they are used to the easy life the oil money has given them so far but this was a one-way road as has become clear by now. Any further down that alley will just make the crocodile bigger and it has already grown to monstrous proportions.

Starting to tackle your fundamental problems now is still much easier than doing so later even if the current problems are already daunting. Imagine what it’s going to be like after some more years of oil money induced standstill. It might even blow some countries up then.

Shale oil is therefore maybe even the saviour of your social fabric, of your continued existence as a country, of your way of life. As hard as it looks from the vantage point of an OPEC country you should thank those pesky shale drillers as they might have pulled you back from the abyss at the last moment.

Even the hardest-headed oil-aholics have come to understand by now that oils days are numbered. Shale has slowed the countdown down but nothing will stop it again.

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