20190228 opec saudi arabia oil

Editor’s Note: Dan K. Eberhart is CEO of Canary, an independent oilfield services company in the United States, and a frequent commentator on oil markets and US politics. The opinions expressed in this commentary are his own.

Congress has been debating the No Oil Producing and Exporting Cartels Act, or “NOPEC,” which would make international oil cartels illegal, exposing countries that coordinate on the price of oil to the risk of litigation in US courts.

The odds are pretty good that anti-OPEC (Organization of the Petroleum Exporting Countries) legislation could eventually win the approval of Congress, given rising anti-Russian and Saudi Arabia sentiment, including anger over President Trump’s response to the murder of journalist Jamal Khashoggi, and the subsequent resurgence of progressive Democrats in the House of Representatives.

For decades, OPEC has been an economic bogeyman to the United States, and for much of the time since its founding in 1960, the cartel has deserved that status. But the time to see OPEC, particularly Saudi Arabia, as an enemy has passed. Punishing OPEC would be a mistake, no matter how popular it is with voters.

American consumers and policymakers have not forgotten the oil embargoes and gas lines of the 1970s, the remarkable run-up in oil prices to nearly $150 a barrel in 2008, or the price collapse in 2014 the drove companies into bankruptcy and cost American jobs, all prompted by the anti-market activities of OPEC. But over the past five years, OPEC has become an integral partner in America’s energy security by regulating the supply of oil and maintaining a generally fair oil price.

OPEC’s moderating role has allowed the US oil sector to achieve record oil production and has made America a major energy exporter — something that seemed impossible less than a decade ago. More often than not in recent years, the cartel has succeeded in keeping the price of oil just high enough to spur investment in new shale fields, but low enough to keep consumers happy.

Consistently hitting such a sweet spot is no easy task, and it’s why the Saudis should be considered a partner rather than an adversary. What may not be understood in the marble halls of Congress is that OPEC, particularly Saudi Arabia, Kuwait, Iraq and the United Arab Emirates, hold the lowest-cost oil reserves in the world. Iran also has vast reserves of low-cost conventional oil, but US sanctions have mostly sidelined its production.

Saudi Arabia remains the world’s only real swing producer — capable of adding or subtracting several hundred thousand barrels a day of production in a matter of weeks. With its hands on the taps, Saudi Arabia has considerable power over oil prices — even while the United States has surpassed it as the world’s largest producer thanks to the shale boom.

The shale oil boom is nothing short of remarkable, especially given the collapse of oil prices in 2014, and the prolonged downturn that followed. The tenacity of America’s shale producers earned OPEC’s respect, but the shale sector needs higher prices than the cartel’s leading producers to keep drilling.

The break-even point for shale producers is roughly between $30 and $60 a barrel on average, according to industry watchers. Production costs in some Middle Eastern countries are less than $10 a barrel. If Saudi Arabia, with 268 billion barrels of low-cost reserves, really wanted to bring the shale sector to heel, it could. A price war would no doubt cause pain to those OPEC members with higher production costs than Saudi Arabia, sure. But there’s no doubt that Riyadh has the capability.

Rather than competing with America, though, OPEC, led by Saudi Arabia, has been holding back about 1.2 million barrels of production a day from the market, making room for US shale producers to continue to increase output.

The Saudis have effectively subsidized our oil boom. Any legislator who can’t see that isn’t paying attention.

The symbiotic relationship between Saudi Arabia and America has produced a remarkably balanced oil market, especially given the chaos in Venezuela, Iran and Libya. It has also spurred Saudi investments in other sectors of the US economy.

All of that is at risk if Congress continues to push anti-OPEC legislation. It’s time we realize OPEC is no longer a bogeyman, but an ally with common interests.