Analysis

The end of OPEC

Welcome to the shale era

Did you notice that gas prices are really low? I thought you might have. And if you need a reminder, just look at how far they've plummeted over the last year:

And did you notice how this is having a huge impact on the economy? Not only by speeding up the U.S. recovery, but also by aiding China, Japan, and Europe. Energy prices are one of the biggest limiting factors on the global economy. Most people don't remember that the economy began slowing down in 2007 because of high gas prices fueled by increased emerging markets' demand.

So, what's going on now?

The answer, in a nutshell, is the shale revolution. The new technology for extracting oil and gas from shale reserves — which, let's remember, was opposed every step of the way by progressives, and is characteristic of a special American inventiveness — has proved a boon to the economy, and to employment, and even to the environment, since the revolution is driving a lot of oil and coal to be replaced by less-carbon-intensive natural gas.

But what about OPEC, the cartel of oil-producing countries that has kept gas prices up — and therefore its foot on the throat of the global economy — for 40 years?

At first, people thought that OPEC was purposefully keeping prices low (by not reducing supply) in order to smother the emerging shale industry in the crib. With low oil prices, less investment would flow to alternatives to conventional oil, which can be expensive.

But, as Bloomberg reports, that might not be the answer. The answer increasingly seems to be that OPEC isn't raising prices because it can't raise prices.

The cartel isn't holding. The smaller OPEC members don't want to shrink output — which would have to happen to raise prices — because their economies are too unstable and they can't afford it. Even Saudi Arabia, the most important OPEC member, is in favor of staying the course.

But more importantly, everyone in OPEC knows what would happen if they tried this: U.S. oil producers would put back online all those rigs that they have idled since prices plummeted.

OPEC is stuck in a Catch-22: Low prices mean they don't control the market anymore; but if they raise prices, they lose control of the market.

Investment in shale is only going to continue. And that means we may be witnessing one of the most significant geopolitical and economic events of the past 50 years: the death of OPEC.

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