Since the fracking industry in the US has started to grow rapidly, I have heard increasing reports that OPEC is attempting some form of predatory dumping in the hopes of making the fracking industry in the US unprofitable.
How successful do economists predict that OPEC's dumping strategy will be? For example, does OPEC have a large profit margin and the fracking industries a small profit margin (making fracking an unprofitable enterprise quite easily under some form of predatory dumping) or are the profit margins close enough to make any predatory dumping infeasible in the short-run?


This is the cost curve of oil production (North American shale at $65):

enter image description here Source

And this is the cost curve of major American projects:

enter image description here Source

While "Citi's Ed Morse highlighted this chart, showing that for most US shale plays, costs are below $80 a barrel."

And clearly, many of these new projects would lead to losses with oil prices at $60:

enter image description here Source

The problem with predatory pricing (if it's purposeful) is that OPEC itself depends on high oil prices to ensure balanced budgets in their (mostly dictatorial) regimes. Their sovereign funds are large enough to survive a brief (2-3 years) period of low oil prices, but in the long run, dumping endangers their rulers' positions:

enter image description here

enter image description here Source

You can't kill American oil production this way—it would return after these two-three years anyway.

The \$60-80 band leaves space for most American projects, while oil below \$60 kills too many OPEC members. So, it does not seem to be a good dumping strategy.

  • $\begingroup$ "it would return after these two-three years anyway" - [citation needed]. Might be worth thinking about what the risk-reward balance is for the next wave of investors, if the present wave get wiped out. $\endgroup$ – EnergyNumbers Dec 28 '14 at 3:33
  • $\begingroup$ And please do separate out short-term and long-term costs. It's not clear from your charts, but AIUI, they are LRAC $\endgroup$ – EnergyNumbers Dec 28 '14 at 3:39
  • $\begingroup$ You do mean curve, not curse in the first line right? Too minor for me (as a low rep user here) to edit, but it kind of changes the meaning totally. $\endgroup$ – Journeyman Geek Dec 28 '14 at 12:32
  • $\begingroup$ @JourneymanGeek It's "curve." Thanks a lot for noting this. $\endgroup$ – Anton Tarasenko Dec 28 '14 at 14:51
  • $\begingroup$ @EnergyNumbers Thanks for comments. Investors in oil production must be aware about OPEC's limited dumping opportunities. Their investments aren't wiped out, but may be delayed. $\endgroup$ – Anton Tarasenko Dec 28 '14 at 15:30

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.