The Changing Anatomy of U.S. Oil Imports Over the Last Decade.

IN 10 SHORT YEARS, CANADA HAS REPLACED THE ONCE MIGHTY OPEC

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OPEC was once a name that made world leaders shake in their boots.

In the early 1970s, the infamous oil cartel controlled more than 50% of global market share. The power of the cartel was also clear – in response to the Yom Kippur War of 1973, many OPEC countries (that were a part of OAPEC – the Organization for Arab Petroleum Exporting Countries) initiated production cuts and an oil embargo against Western countries.

Oil prices quadrupled from $3 to $12, and OPEC producers raked in the cash.

Meanwhile, the West was in a panic. Emergency energy rations were imposed, currencies were devalued, gasoline sales were restricted, and Sunday driving was banned in seven European countries.

NO LONGER MIGHTY?

The organization still has some influence, though it seems to be harder to come by.

After many months of squabbling, OPEC recently came to its first deal to cut production since 2008. That’s kept the oil price above $50/bbl, but gains will be effectively capped once low-cost shale producers ramp up production again.

OPEC often touts its 81% share of global “proven” reserves as a sign of its might:

However, it seems OPEC’s peak influence is in the rear-view mirror due to several external factors.

To start with the obvious, oil is slowly waning in importance in the global energy mix. According to the EIA, oil made up 34% of total global energy demand in 2010. By the year 2040, the EIA expects this share will be closer to 30%, though things could happen faster if the technology behind renewables and batteries makes a bigger impact than expected.

Next, U.S. domestic production has almost doubled because of the shale and fracking revolution. In 2008, the U.S. produced 5.0 million bpd, and in 2015 the country averaged 9.4 million bpd.

Lastly, as you can see on the chart, accelerated development of Canada’s Oil Sands has enabled the U.S. to buy any imports needed from Canada instead of the Middle East. In 2005, Canada only supplied 16.1% of U.S. oil imports, but Canada is now the major supplier of oil to the U.S. with a massive 43.0% share.

With Donald Trump taking the reins in 2017, Obama’s decision on the Keystone XL pipeline could easily be reversed and then fast-tracked for completion. Such a move could bump Canada’s share of U.S. oil imports even higher, downsizing influence from OPEC even more.

INTERNAL FRICTION

It’s not just a changing global macro environment that is hurting OPEC’s influence.

Internally, their members have shifting goals and needs, and this has made the organization largely dysfunctional over recent years.

The biggest factor? It’s Saudi Arabia, a country that is the largest oil producer in the group, but also a global low-cost leader. It has outsized influence in the cartel, but it also has way bigger margins to play with. This means that sometimes maintaining market share is more important than maximizing profit margins for the Saudis, and other countries disagree with this stance.

With the Saudis finally capitulating to a production cut, maybe the OPEC forces can remain aligned over the near-term. Then again, it might be a temporary fix as OPEC influence continues to slowly sink – especially now that OPEC as a whole is only the second biggest supplier of imports to the U.S., and shrinking.

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