Is OPEC Doomed?

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 |  Includes: OIL
by: Oil & Energy Daily

The Organization of Petroleum Exporting Countries (OPEC) has been inching toward irrelevancy for a while now.

Desert oil fields that were rich with black gold 50 years ago have been slowly drying up. New discoveries in the North Sea and off the coast of Africa and Brazil have increased supplies from non-member countries. And now the cartel is staring down the barrel of the biggest threat it's ever faced: North American shale.

U.S. oil production is up by 760,000 barrels per day this year - the biggest annual increase in output the country's seen since it first began producing crude commercially back in 1859. It's expected to climb another 640,000 barrels to 7.1 million barrels per day in 2013. And the National Intelligence Council estimates U.S. oil output will expand to 15 million barrels per day by 2020 - enough to supplant Saudi Arabia as the world's largest producer.

The International Energy Administration's (IEA) forecast is a little less rosy. It believes U.S. oil production will peak at about 11 million barrels per day in 2019, and then gradually decline about 9 million barrels per day by 2035.

The IEA also has the U.S. becoming a net exporter by 2030.

Not to mention, Canada's shale resources are expected to boost crude oil production there from 3 million barrels per day in 2011 to 4.7 barrels per day by 2020.

But let's put aside lofty expectations and premature proclamations of energy independence, and simply focus on the plain fact that North America's oil output is rapidly increasing.

And while fracking has opened the door to millions of barrels of new reserves in North America, most Middle Eastern countries are getting their oil from wells that were drilled decades ago.

For instance, Saudi Arabia's Ghawar oil field - the world's single largest - was discovered in 1940. It alone accounts for about two-thirds of the kingdom's output. The rest of Saudi Arabia's production comes from the Abqaiq, Safaniyah, Zuluf, Berri and Shaybah fields, which all began producing in the 1940s, 50s and 60s.

Unfortunately, since the Saudis have refused to share any of their well data since 1982, it's impossible to know how much crude remains. That's led to skepticism regarding the kingdom's claim that it has another 50 years' worth of supply.

In fact, American diplomats in Riyadh warned in confidential cables written between 2007 and 2009 that Saudi Arabia's overall crude reserves may have been overstated by as much as 40%.

And even if the country has as much oil as it claims, there's still no way it will be able stay atop the global supply chain.

Venezuela has already overtaken Saudi Arabia as the country with the world's largest proven oil reserves - although it's not a very reliable supplier. The country produces just 3 million barrels of oil per day, compared with about 10 million barrels for Saudi Arabia.

Still, regardless of who's doing the pumping, OPEC is on the verge of losing its biggest customer. And there's not much the group can do about it.

Budget Breakdown

You may recall that back in the 1980s, Saudi Arabia and its OPEC allies ramped up production, deliberately suppressing oil prices and preventing the United States from developing its own more expensive sources.

There has been speculation that the cartel might make a similar move to undermine shale, since it's more expensive to produce than traditional crude. But that's not at all likely, given the hefty financial burdens many OPEC nations face.

Countries in the Gulf Cooperation Council (GCC) rely on oil exports for 80% to 90% of their budgets. And as soon as it became apparent that historically high oil prices were the new norm, these countries increased spending. Combined budgets of GCC nations rose 19.3% to reach $359.1 billion in 2012, compared with actual spending of $301.1 billion in 2010.

Additionally, Saudi Arabia and others vastly increased their public spending and social services following last year's Arab Spring. Saudi Arabia alone unveiled some $130 billion worth of additional expenditures in the wake of the violent revolutions that toppled several Middle Eastern regimes.

Venezuela and Iran - whose production has also been hobbled by rigid new sanctions - also rely on oil revenue to fund their expansive social programs and energy subsidies.

As a result, most major oil-producing nations need oil prices north of at least $80 a barrel to break even on their budgets.

For example, the United Arab Emirates (UAE) needs oil prices of at least $84 a barrel to balance its budget, according to the International Monetary Fund (IMF). And Bahrain requires prices of $119 a barrel to break even.

And that's going to be a real problem if the United States and Canada ramp up production to the degree that many analysts are projecting. Demand from emerging markets will continue to swell, and that will continue to buoy oil prices and keep OPEC afloat… for a while.

In the long term, natural gas, nuclear and other forms of renewable energy will come to replace oil. And that's if the Middle East doesn't run out of crude first. And in the short term, OPEC will see its influence over global oil prices eroded as the world's top consumer transforms into a net energy exporter.

And "the chase" continues,

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.