Tomorrow in Vienna, the members of the Organization of Petroleum Exporting Countries will meet once again to jawbone about oil prices.
But here’s the reality: OPEC is no longer a price maker, it’s a price taker. The price of oil is no longer being set by the cartel, it’s being set by U.S. drilling companies producing oil from shale deposits. And those drillers are thriving largely because of three key advantages, ones that I call the three Rs: rigs, rednecks, and rights.
Before I explain how the three Rs have neutered OPEC, let me state the obvious: The oil produced by the organization’s members still matters. OPEC supplies about 30 million barrels of oil per day, or about one-third of global demand. But OPEC today consists of Saudi Arabia and the eleven dwarves.
Sure, the now-bankrupt Venezuela is agitating for production cuts. (It always is.) And Iran, which needs to have oil sell for about $140 barrel to balance its budget, wants higher-priced petroleum. But Saudi Arabia is the only OPEC member with significant spare production capacity. And the Saudis appear happy with a price of about $75 per barrel.
They can afford to be content. Saudi Arabia is flush with cash, with over $1 trillion in the bank, according to various estimates. Further, Saudi Arabia owns refineries with a total capacity of 2.5 million barrels of refined products per day, and it recently announced a major expansion. By owning refineries, the kingdom can exploit the crack spread — the difference between the price of crude and that of refined products, like gasoline, diesel fuel, and Jet A fuel — and in doing so, more easily monetize its own sour crude (which sells at a discount to the Brent and WTI markers).