As we’ve fixated this summer on Greece and Syria, the global energy drama in play since mid-2014 has slipped from view. The epic price collision between foreign producers and the U.S. shale oil industry has entered a potentially pivotal round.

Since the mid-2000s, ever more plentiful North American shale oil has rattled OPEC’s lower-cost suppliers. Then, in June last year, the strongest and richest of the Persian Gulf suppliers decided to maintain rather than cut production, aiming to drive down global prices to give a hammer blow to U.S. shale producers, thereby preserving the cartel’s market share.

ADVERTISEMENT

To date, the price war shows distinctly mixed results. One thing is clear: a by-the-numbers, textbook capitulation by U.S. producers to the 70-percent oil price fall simply hasn’t happened. Even the looming entry of more Iranian oil going into global markets – potentially by as much as 1 million barrels per day —needn’t sound shale’s death knell.

To date, very few shale oil firms have gone bankrupt. Instead, they’ve shed personnel, tightened operating budgets, driven tough new deals with subcontractors, and tweaked their extractive technologies to even higher yields. They’ve fine-tuned their financial, as well as their oil field, engineering.

Using fewer than half the drilling rigs in use last year, U.S. firms are still delivering the same amount of oil to market, in the same quantities which the Persian Gulf monarchies find so threatening.

Cushioned by large forex reserves, the rich Persian Gulf producers ignore other OPEC members’ plea for higher export prices. Despite their own eroding fiscal position, the Saudis remain committed to keeping global prices low enough, and long enough, to cut sharply into US production – at which point new, scarcity-driven oil price rises will handsomely reward the Kingdom.

To be sure, the strategy has hit the US oil industry hard. Over 150,000 American oil industry workers lost their jobs this past year. But the contest transcends both job numbers and weekly guessing games about shale oil’s latest ‘break-even point’. For shale producers, beneficial competitive consequences include wellhead innovation, new financing, restructuring (including M&A bids) and intra-industry consolidation.

Far from bowing to simple ‘price determinism’, the U.S. hydrocarbon industry’s familiarity with boom & bust cycles gives it the experience to ride out the storm. Lenders and investors remain in the picture, willing to finance, refinance, or take equity, all helped by low interest rates.

The goal of doing permanent damage to U.S. shale oil production thus seems out of reach. Despite the fiercely competitive environment, U.S. producers are proving a resilient foe.

The historian Arnold Toynbee described world history as a recurrent pattern of “challenge, and response,” a maxim applicable to U.S. oil production as well. And beyond the industry’s responsive efficiencies, other factors also portend its survival. 

Export oil price falls have hit Russia, Venezuela, Nigeria, and Angola hard. For these and other countries like them, empty state coffers portend alarming, systemic political risk raising market doubts over their own reliability as suppliers.

Geographical proximity to our own American end-users also aids the industry’s survival. U.S. shale oil reaches US refineries, transport networks, industrial hubs, and to manufacturers using oil as feedstock as well as fuel. These geographical advantages help to offset suppliers of less expensive but more distant oil.

The strengthening U.S. manufacturing renaissance rests in part on abundant domestic energy supplies. US shale oil producers will also gain from an inevitable disappearance of legal restrictions on U.S. crude oil exports, a legacy of the 1970s. The reconfiguring of American refineries, for cracking and processing domestic shale oil, will also boost domestic hydrocarbon competitiveness.

Meanwhile, the epic price war continues, pitting shale innovation against established cartel producers. The likely result: A tighter, leaner, merged and reconstituted shale industry emerging largely intact. Though much cannot be forecast, including the extent of future Iranian sales, these years – and this summer – could come to be seen as the moment when OPEC’s old style price manipulation paradoxically entrenched still further the very same innovation and efficiencies which spawned the shale oil challenge.

Clad is an international political risk consultant and was U.S. deputy assistant secretary of defense for Asia Pacific Affairs from 2007-09.