Foiling OPEC

A recent WSJ op-ed by Robert McFarlane said, “If we produce more oil, OPEC will sell less to keep prices high.”

While this has been true in the past, it might not be true in the future, if we produce enough additional oil.

In OPEC, Saudi Arabia has received the most money from oil exports, over $180 billion in 2010.

But, Saudi Arabia and many other OPEC countries are Petro-welfare states, and they need the revenue to keep their populations happy. There is a limit to how much OPEC can cut its oil output before revenues, even with today’s high prices, fall to levels that would be untenable for OPEC nations.

Only Saudi Arabia can absorb significantly lower oil output, with other OPEC nations, such as Iran, Iraq, Libya and Venezuela, needing to sell every drop of oil they can produce.

Saudi Arabia produces around 10 million barrels of oil per day.

Today we produce about 6 million barrels of oil per day (bbls/day) with Canada producing an additional 2 million bbls/day.

What if we produced 10 million bbls/day and Canada produced 6 million bbs/day?

That’s 16 million bbls/day, which would make us (Canada and the United States combined) the largest oil producer in the world, and we would have the upper hand.

Saudi Arabia couldn’t cut its production by 4 million bbls/day without threatening the overthrow of its government. Saudi oil production would have to remain at 10 million bbls/day.

And if world oil demand increases, as expected, with China and India using more oil, our increased output would still be enough to keep OPEC at bay.

But, can we produce 16 million bbls/day? This is twice what we produce today.

Reputable forecasters, such as Bentek Energy, are already predicting that we and Canada will produce 12 million bbls/day by 2015, and that’s without opening the outer continental shelf, federal lands and ANWR for oil development.

This is all because of fracking, which has been the greatest boon to the United States energy supply since the Spindletop gusher in Texas in 1901.

There’s every reason to believe that we and Canada can produce 16 million bbls/day.

It goes without saying that we would be in a better position to withstand the impact of a sudden cut-off of Mideast oil if we increased our production of oil, though increased production couldn’t completely insulate us from higher prices resulting from such a dramatic event. This is where the strategic petroleum reserve would come into play.

The WSJ op-ed was wrong in suggesting we couldn’t drill our way out of our current pricing predicament.  OPEC would destroy itself if it had to cut output by 4 million bbls/day.

Our strategy should be to open up all our potential drilling sites, aggressively use fracking, and then drill, drill, and then drill some more.

OPEC nations couldn’t survive if OPEC tried to cut its output in the face of this juggernaut.

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