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 Current World Oil Production

With oil prices plunging, OPEC and Russia are on their knees
[Via Quartz]

In a way, the message of OPEC’s inaction today—deciding not to cut supply—is analogous to the challenge that confronted GM and Microsoft in recent years: if it wants to remain relevant in a world it once dominated, and at times made tremble, it needs to change its game.

For much of the rest of the world, including great power-consuming nations like the US and China, the message is very different—that of an ill-defined but temporary window in which to solve big strategic problems until very recently thought to be intractable.

The trigger for this new state of affairs is dual—the US shale-oil boom, which has wholly muffled the geopolitical disruptions behind previously skyrocketing oil prices, and soft demand from a transforming Chinese economy.

On the sidelines are menacing new supply threats to the status quo—even more oil from the US in the coming three to five years, from Iran in the not-far-fetched scenario of a nuclear deal, and from till-now war-constrained Iraq and Libya.

Traders have observed all this supply, detected no basis for a surge of demand, and sent prices plunging. Just today, futures of internationally traded Brent crude plummeted as low as $71.25 a barrel, down 41% since peaking for the year in June at $115.71. US-traded West Texas Intermediate—the pricing basis for shale oil—fell more than $5, to as low as $67.75 a barrel, puncturing another threshold.

Members of the OPEC cartel have desperately flailed away, given that most of them cannot meet their state budget obligations at such prices (see chart below).

Here is how capitalism can be very useful when dealing with scarce resources (the map above shows oil producing states, with darker being more oil). The high price for oil maintained by OPEC incentivized people to find other sources.

They did, with the shale-oil boom in North America leading the way. This is driving the low cost of oil more than anything right now.

Meaning OEC cannot raise prices by constraining supply, as they hve done. Because that just means more shale oil from non-OPEC states, like the US and Canada.

So all they can do is hunker down and wait it out. Except, as we have seen, with companies like MIcrosoft, that is a sure path to irrelvancy.

Because new non-oil technologies are likely to have greater impact in the same timeframe.

It is likely that OPEC and the other countries dependent on oil revenues, such as Iran and Russia, will be under tremendous financial pressures unless they can diversify their economies.

Meanwhile, the world has a chance to re-evaluate its energy processes and perhaps find something better than fossil fuels.

Sometimes capitalism works especially when its distributed bottom-up approaches are allowed to succeed. Now this may be the reason we may not need really disruptive top down approaches.

Oil may be irrelevant in 10 years. That would be nice.