Shale Oil Producers: Swing Producers or Price Takers?

The new narrative in the oil markets is that shale oil producers have usurped the Saudis as the swing producers. What a dangerously naïve idea.

A swing producer is one that intentionally changes its production levels to achieve its objectives. If oil prices drop and Saudi Arabia decides to reduce production so as to stabilise oil prices then that is the action of a swing producer. In other words, a swing producer can intentionally move prices.

A price taker is a producer that sells oil at whatever price it is given. It has no market pricing power. If oil prices drop and shale oil producers are forced to stop production because they are registering massive losses then they are price takers.

Just because shale oil producers become profitable at USD 100 and come online at that price does not mean that they are swing producers. As in any other market massively high costs means that you are at the bottom of the food chain. Costs that are 30 to 50 times that of the largest oil exporter in the world indicate that shale oil producers are not only at the bottom of the oil production food chain, they might very well be buried deep underground.

Saudi Arabia remains, by a large margin, the most important producer of oil globally.