Who Do You Think Will Win This Price War?

By abdicating the role of the global swing producer, OPEC believed it would put pressure on the relatively high-cost shale boom, forcing producers to trim production as certain plays became unprofitable.But U.S. firms haven’t assumed that role as readily as the Saudis would have hoped. Rather, they’ve been hard at work innovating their way to profitability even at $65 per barrel.

This article is especially interesting for several reasons:

(1) It’s another example of the difficulties of maintaining cartels for long periods of time. They create artificially high prices that create higher demand in markets for substitutes.

(2) The cartel needs a low price to retain its place as the dominant producer, but lower prices hurt its power to maintain the cartel.

(3) Low prices may drive progress in extraction technology, rather than cause suppliers to exit the market.

(4) International trade–in ideas as well as in products–is driving all of this. I suspect a lot of the increase in Chinese production is coming Chinese producers applying and extending technology developed by firms initially interested in getting to marginal deposits in the U.S.