Sunday, October 04, 2015

Oil prices have wreaked havoc on the market over the past year. Most people have pointed to OPEC as the reason prices have plunged and thousands of U.S. oil workers are out of work. But is OPEC really to blame for the drop in oil prices?

OPEC is a cartel for nearly 30% of the world's oil production giving it a massive influence on oil prices. But it does not control all oil prices. Far from it, actually; OPEC's role has been more of a stabilizer in oil markets. If prices went up too much OPEC would produce more oil to lower prices, and if prices got too low it would cut production to push prices higher.

With these abilities to control 30% of output, OPEC was able to stabilize prices from the early 1980s to the mid-2000s, when everything changed. That’s because U.S. oil companies found a new source of oil; fracking. Fracking unlocked millions of barrels of oil under the earth's surface to flood the markets and significantly boost supply.

This oil supply was always present and known of for decades but never made too much economic sense to tap. The cost of research, equipment and labor never left much of a profit margin… until oil prices shot up to near $100 per barrel.

U.S. oil production exploded just as oil seemed to stabilize near $100 per barrel. The country added 2.478 million barrels per day to global supply in 2013 and 2014 alone. Canada followed suit and added an average of 0.662 million barrels daily. But while U.S. supply exploded, global demand only grew by 2.119 million barrels per day between 2012 and 2014.

It was fracking in the U.S. and Canada alone essentially created the oversupplied oil market we see today, not OPEC.

TAGGED AS:

• fracking
• oil market
• oil production
• OPEC