US oil production is booming and profitable, defying previous expectations. Bloomberg Opinion columnist Javier Blas discusses the state of US supply and its impact on OPEC. The podcast also covers rising tensions in the Red Sea and the rise of electronic electricity trading in Europe.
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Quick takeaways
US shale oil production is at a record high, surprising the industry with its profitability and attracting investments.
The rise of electricity trading firms in Europe presents systemic risks and regulatory challenges, despite their significant profitability.
Deep dives
US shale oil production is at an all-time high
US oil production, especially shale oil, is currently at a record high, with the US producing one in five barrels of oil consumed globally. Technological advancements, such as drilling longer and more efficient wells, have allowed oil companies in states like Texas and New Mexico to extract more oil and increase production. This growth in US shale oil production has surprised the industry, with companies making substantial profits and attracting investments. However, the dependence on OPEC's decision to cut production and keep oil prices high is a concern for the future.
The profitability and funding of US shale oil
Unlike in the past, US shale oil companies are now focused on profitability and generating sufficient cash flow to sustain their operations. Rather than relying heavily on Wall Street funding, they are using internal cash flow to finance their growth and investments. This shift in strategy has allowed companies to generate significant profits and even pay dividends, making investors and the industry optimistic. While publicly listed companies have been more cautious and focused on shareholder returns, private companies have experienced more growth. However, the risks and systemic implications of the new breed of electricity traders in Europe are a growing concern.
OPEC's dilemma and the future of production
OPEC faces a dilemma as US shale oil production continues to increase and challenge their market share. OPEC's strategy of cutting production to support prices has allowed shale companies to grow and become more profitable. However, OPEC is betting on shale production growth eventually slowing down and demand continuing to rise. The success of their strategy depends on their ability to bring back production that was taken off the market. If their predictions are wrong, OPEC may need to reevaluate their strategy and either cut production further or accept lower oil prices, which could lead to a period of low revenue for OPEC countries.
Changes and concerns in European electricity markets
The European electricity market has undergone significant changes with the rise of electricity trading firms specializing in short-term trading. These companies have capitalized on increased market liberalization, cross-border trading, and the volatility of wind and solar power supply. They use computer-driven algorithms to trade based on short-term demand forecasts, with some firms trading 140 times per second. While these firms have reaped massive profits, there are concerns about their systemic risk and the lack of regulatory oversight and understanding. Additionally, standardization and technological advancements have played a key role in the profitability of electricity trading.
We here at The Big Take are big fans of our colleagues and friends over at the Odd Lots podcast, hosted by Joe Weisenthal and Tracy Alloway. Please enjoy this episode, and hop on over to subscribe to their feed if you like what you hear!
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In the early 2010s, US shale players were producing oil like crazy, with no concerns about profitability. Then the legs were kicked out from the industry, causing a massive bust and massive oversupply. In 2021 and 2022, it looked like a very different story. Oil prices were surging and it seemed as though US players had found religion, learning how to maintain production discipline and improve profitability. But now we're in a new era that nobody saw coming: US oil production is booming. In in fact, it's at a record high. What's more, industry participants are actually making money at the same time. So how did they do it? And how did the prognosticators get things wrong? On this episode of the podcast, we speak with Bloomberg Opinion columnist and commodity specialist Javier Blas. We discuss the state of US supply and what it means for OPEC. We also talk about the rising tension in the Red Sea, as well as his reporting on the rise of electronic electricity trading in the European market.