The New Normal Adjusting To A Post Fracking World Oil Market James M. Griffin Bob Bullock Chair & Professor in Economics & Public Policy George Bush School Texas A&M University October 25, 2016 IAEE Conference, Tulsa, OK.

What does the “New Normal” mean for: Long term oil pricing? OPEC’s strategic role in world oil market? North American self sufficiency?

The Effect of Fracking In High & Low Oil Price Environments North Dakota Texas Source: U.S. Energy Information Administration

Effect of Lower Prices on Drilling Rest of U.S. North Dakota Texas Texas Texas Source: * U.S. Energy Information Administration * Baker Hughes

Is Fracking Dead In the New Normal? What will be the price in the New Normal? $30 Oil Yes. $40 Oil ? $50 Oil ? $60 Oil Probably not. $70 Oil No.

Texas Shale Oil Has Fought Saudi Arabia To A Standstill OPEC's worst fears are coming true. Twenty months after Saudi Arabia took the fateful decision to flood world markets with oil, it has still failed to break the back of the US shale industry.

Texas Shale Oil Has Fought Saudi Arabia To A Standstill Twenty months after Saudi Arabia took the fateful decision to flood world markets with oil, it has still failed to break the back of the US shale industry. Although it succeeded in killing off a string of global mega-projects in deep waters. North America's hydraulic frackers are cutting costs so fast that most can now produce at prices far below levels needed to fund the Saudi welfare state and its military machine, or to cover OPEC budget deficits. Total output in the US has fallen by 1.2m barrels a day to 8.5m since the peak in April 2015 but production has been bottoming out. Today's frackers can just about cope with oil prices in the $40 to $50 range.   Saudi Arabia has deeper pockets but its net foreign reserves have fallen from $737bn to $562bn, even though it is borrowing money abroad to slow the loss. Source: http://www.telegraph.co.uk/business/2016/07/31/texas-shale-oil-has-fought-saudi-arabia-to-a-standstill/

A Sobering Set Of Facts The Resurgence of Middle East in A World of Anemic Demand Growth U.S. Source: * U.S. Energy Information Administration * Energy Intelligence Group * OPEC

OPEC’s Strategic Role In Determining The New Normal Because of Fracking + Anemic Demand Growth. OPEC’s upside options are limited. 2. Gains from collusion are higher in a low price world. But so are incentives to cheat (e.g. Mid 1980’s). 3. Expect more efforts to limit OPEC output. Greed trumps animosities. But, fracking will discipline the OPEC’s price ceiling.

Implications For North American Self Sufficiency OPEC and Saudi Arabia cannot afford to lose this market! Quantity In MMB/D Source: * U.S. Energy Information Administration * International Energy Agency