NEW YORK (TheStreet) -- The Organization of the Oil Exporting countries (OPEC) has made gross mistakes in the past several years in understanding the evolution of the world oil market and is now suffering the consequences. Despite investor hopes that decisive action in an OPEC meeting scheduled for this week will stem falling prices, such action is unlikely.
Unless a significant, further collapse of oil prices occurs, OPEC will do nothing now. OPEC is counting on lower oil prices slashing U.S. shale oil production, thus doing what the organization is unable to do. This hope is likely wishful thinking.
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OPEC's Three Major Mistakes
1. Underestimation of the U.S. Shale revolution. OPEC has long considered the growth of U.S. shale oil production a temporary, marginal and costly phenomenon. In 2013, OPEC thought the break-even for U.S. shale oil was at around $90 per barrel. In 2014, it revised it downward to $70 barrel.
While OPEC was just figuring out the extent of the U.S. shale market, it was already roiling domestic and international prices. In September, the U.S. exported about 4.5 million barrels per day of oil (mostly oil products such as gasoline, given the substantial ban to export crude), helping cause the current precipitous drop in oil prices. U.S. shale production growth has also chipped away hopes by OPEC members to defend an already reduced share of the U.S. market for their crude, and pushed them all to scramble for selling incremental volumes to Asia, where the market has become overcrowded.
Saudi Arabia, a key OPEC member, cut its crude oil prices to the U.S., a move aimed at shoring up its U.S. market share and put pressure on domestic shale oil production. But the discount was too low to displace other crudes available to the U.S. market or to have an effect on the shale industry. (To be sure, Saudi Arabia is not interested undercutting its other customers, particularly in Europe.