SAUDIS PLAY CHICKEN WITH AMERICAN OIL SHALE:

The benchmark for American crude, called the West Texas Intermediate (WTI), fell below $80 per barrel for the first time in more than two years in trading today before staging a small rally. Similarly, Brent crude, Europe’s benchmark, traded below $83 per barrel, a four-year low, before seeing a slight rebound on what Reuters explains to be “technical buying ahead of options expiry for U.S. crude oil and contract expiry for Brent crude.”

But temporary rebound notwithstanding, there’s no denying that this is a bear market for crude oil. Brent prices have dropped by more than 28 percent since June, while WTI has tumbled nearly 25 percent in that same time period. Weak demand has collided with an oversupplied market, partly due to Libyan supplies coming back online after protracted disruptions, and, of course, in part due to booming supplies out of the suddenly shale-rich America.

The question on everyone’s minds is, where is OPEC? The cartel of petrostates has colluded in the past to cut production to keep prices artificially high, yet the organization’s largest producer and, historically, the one most likely to take the lead on these cuts—Saudi Arabia—has cut prices, not production, in recent weeks. . . .

There has been some speculation that the Saudis may be looking to abdicate their role as OPEC’s (and therefore the world’s) de facto swing supplier, banking on the fact that U.S. shale producers, the new kids on the block, will soon have to cut production because fracking will cease to be profitable. America’s unconventional oil drilling tends to be more expensive; the IEA recently announced that at $80 per barrel, 96 percent of shale drilling would still be profitable, but if WTI prices were to dip much lower, the shale boom would hit a considerable hurdle.

We’re not there yet, and in fact the price of oil today exists in a kind of sweet spot: high enough to continue to incentivize U.S. fracking, but low enough to benefit American consumers (average gas prices in the U.S. are at their lowest level since 2011) and stymie some of America’s geopolitical opponents. Russia, for example, needs oil to trade above $100 per barrel to balance its budget.

The Saudi strategy isn’t unlike a game of chicken. The Saudi breakeven price hovers around $93 per barrel, and while it can afford to operate in the red to gain market share for now, it may not be able to do so in the long term. Banking on American shale production cuts may be a bigger gamble than the Saudis expect, too: it will take some time for the market to shift and fracking to draw down, even if prices continue to plunge.

And U.S. shale has a final trump card: innovation. Though fracked wells have steep decline rates, drillers continue to optimize rigs and maximize output while minimizing costs.

Under a Reynolds Administration, I’d respond to this “chicken” game by opening up federal lands to exploration and drilling.

UPDATE: Some support for a Reynolds 2016 campaign in the comments. Hmm. What would my slogan be? How about An Inexperienced Law-Professor President Got Us Into This Mess, And It’ll Take An Inexperienced Law-Professor President To Get Us Out!