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How OPEC could lose the oil wars

The U.S. energy industry is clearly on its heels. Drillers are shutting down rigs, oil and gas firms are slashing jobs and plunging prices are gutting profitability, even at huge firms such as Exxon Mobil (XOM).

But American drillers could ultimately benefit from the pressure to become more competitive. And OPEC, the oil cartel led by Saudi Arabia, may end up regretting its effort to push down oil prices and destabilize American drillers. “We’re wounded but we’re not dead, for sure,” Gary Evans, CEO of Texas-based driller Magnum Hunter Resources (MHR), tells me in the video above. “If their goal was to crush the US oil and gas industry, that isn’t going to happen. We are a very resilient industry.”

Oil prices, currently around $57 per barrel, are about 45% below peak prices from last June. Normally, when oil prices fall, Saudi Arabia and other OPEC nations cut back production, to help support prices. But they haven’t done that this time, with aggressive levels of production largely viewed as an effort to force some U.S. drillers out of the market and make sure OPEC retains its global market share.

Saudi Arabia and many OPEC members can produce oil more cheaply than U.S. frackers, who rely on new horizontal drilling techniques that have led to a surge in U.S. oil production during the last five years. Most OPEC drillers can still make money with oil at, say, $50, while many U.S. drillers lose money with prices that low—which makes it a no-brainer to cut back production or stop drilling altogether.

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The Saudi move seems to be working—but Saudi Arabia could also be more vulnerable than it's letting on. Even though the oil glut caught mostly everybody by surprise and pushed storage levels near capacity, there’s not nearly as much oversupply as there was in prior oil busts. “We’ve only got one million to 1.5 million barrels per day of overproduction,” Evans says. “During prior busts we had 10 million barrels per day. The oversupply is not very much.”

Many analysts, meanwhile, think Saudi Arabia is producing about as much oil as it can, though the oil-rich nation doesn’t exactly spell out its true pumping capacity. If so, the current glut could end sooner than expected. Forecasters are generally predicting that oil prices will stay where they are, more or less, for the rest of 2015. But consensus expectations have been dramatically wrong before.

One consequence of falling oil prices has been stronger demand, with motorists driving more and some nations taking advantage of low prices to stockpile crude. Increased demand, of course, typically pushes prices up, and with U.S. drillers cutting everything they can think of, they’re bound to become more efficient and be able to profit at lower and lower prices. That could leave OPEC competing against a much leaner U.S. energy industry.

Stress on American drillers is also ratcheting up pressure on the federal government to allow oil exports, which have been banned since the 1970s. There’s no sign the Obama administration will agree to that any time soon, but energy analysts now say the domestic oil industry needs to be able to target new markets if it’s going to grow and create jobs.

“Exports to the globe are the last significant demand source for U.S. crude,” research firm Bentek concluded in a recent report. “Unchanged, the current U.S. crude export policy signals the end of growth in North America’s shale crude revolution.”

As drillers cut back, the oil will still remain in the ground, of course, and new innovations could help get it out at a lower cost, just as fracking itself proved that oil once thought unreachable could be extracted. “We have the technology,” says Evans. “We have the know-how.” It may just be uncomfortable for a while.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.