Brand New Model, Same Old Price

Feb 2016
New production in the United States, due to a significant increase in unconventional oil reserves that were not exploited until recently, is changing the outlook for the international oil market. The size of these reserves and the speed of response in their development by numerous competing private producers have brought about a new operational model for the global market, in which the price of crude is determined by the marginal cost of production from these unconventional reserves in the United States. The new model replaces its predecessor, in effect since the mid-1970s, in which the oligopoly consisting of OPEC countries adjusted their output against the level of demand to secure monopoly gains. In the new model, U.S. oil output will increase until it fills the demand gap that OPEC production has been unable to meet, creating an unprecedented level of competition in the global oil market. The lifting of restrictions on its oil export further bolts the U.S. presence. In the new model, the profits of OPEC countries will be reduced to the difference between their cost of production and the marginal cost of U.S. production. This paper illustrates the new outlook and operational model of the global oil market.