Several recent articles have announced that the US is now the world’s “swing producer” of crude oil and they imply that the US has grabbed this distinction away from Middle East producers or from OPEC. However, it is not clear that everyone understands the term “swing producer” in the same way.
I think that it is helpful to divide crude oil producers into two camps:
- Those that can (and are willing) to increase or decrease crude oil production to balance supply and demand;
- Those whose production decisions are made in response to market conditions.
Historically, the term swing producer has been applied to the first category of producer above. It has been used in the context of a company, a region, a country, or a cartel (e.g. OPEC) that is willing to cut crude oil production when the market is oversupplied (prices are falling) or willing to increase crude oil production when the market is undersupplied (prices are rising). For the past 40 years or so, OPEC has been willing to increase or decrease production to balance supply and demand at a price level that meets their own objectives. In practice, Saudi Arabia, has been the one country willing to make the production changes adopted by OPEC. Saudi Arabia can do this because it is one of the few countries with underutilized production capacity and one of the even fewer countries which has been willing to throttle back on production when the market is oversupplied. So Saudi Arabia can swing both ways.
Many crude oil producers, such as private oil production companies, react to market conditions. They don’t have the market influence to do otherwise. That is, they make their production decisions based on existing (or expected) market conditions and their expectations of generating an acceptable return on investment (ROI). When the crude oil market is oversupplied and prices are falling, a crude oil producer may cut back on production from existing wells (e.g. low volume wells) or decide not to drill additional wells if anticipated crude oil revenues do not provide an adequate ROI for anticipated production costs. Conversely, when crude oil prices are rising oil producers may be willing to incur additional costs to stimulate existing well production or invest in additional wells. In general, producers who are “economic responders” do not maintain excess production capacity.
These ‘economic responders” are not really swing producers as the term has generally been used historically. They react to market conditions rather than attempting to balance the market.
So OPEC (or, in practice, Saudi Arabia) is labeled a global market swing producer because it has the capability to increase or decrease production and, for much of the past 40 years, has been willing to modulate production to balance supply and demand. US producers (or Canadian or Norwegian, etc.) are affected by changes in market conditions resulting from OPEC’s decisions, and base their production decisions on ROI.
Regardless of terms, the tight oil revolution has resulted in a crude oil production increase which has affected the global market, but in the US the increase has been the result of many independent company decisions responding to market conditions which is very different from the “swing production” attributed to OPEC.