How to Craft a Remarkable SEO Strategy for 2017 – Whiteboard Friday

Posted by randfish

From understanding the big-picture search trends to making sure your SEO goals jive with your CEO’s goals, there’s a lot to consider when planning for 2017. Next year promises to be huge for our industry, and in today’s Whiteboard Friday, Rand outlines how to craft a truly remarkable SEO strategy to help you sail through 2017.

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Video Transcription

Howdy, Moz fans, and welcome to this special New Year’s edition of Whiteboard Friday. I hope you have all had a wonderful holiday season and are about to have a wonderful New Year’s.

This week, we’re going to chat about how you can have a remarkable, amazing SEO strategy in 2017. The first thing I’m actually going to start with is not the broad-spectrum, strategic picture, which we talked a little bit here on Whiteboard Friday about, and I’ll reference some of those, but is actually understanding some of those big-picture search trends. What are the search engines doing? How is that affecting my strategy? How does that mean I should influence and affect my specific tactics for 2017? So I’ll walk through a few of these big ones. There are others, but I think these encapsulate many of the big things we’ve been seeing.

I. Understand the big-picture search trends

  • A huge rise in SERP features, meaning that Google is showing many more types of data and types of markup in the search results. We have, I believe, 17 that we record for Keyword Explorer, but there are another 7 or 8 that we do not record, but that we see in between 1% and 2% of queries. So there’s just a ton of different features that are going in there.
  • A rise in instant answers. This is especially true on mobile, but it’s true on desktop as well. Google is trying to answer a lot of the queries themselves, and that can mean they’re taking away traffic from you, or it can mean there’s opportunity to get into those features or those answers.
  • Intent > keywords: We’re also seeing this trend that started with Hummingbird and now, obviously, continued with RankBrain around intent, searcher intent being more important than keywords in how we target our content. This does not mean you can remove keywords from the equation. You have to understand what the searcher has typed into the engine before you can serve their intent, and very small variations in keyword structure can mean real changes in searcher intent. That’s a critical part of how we craft content for people.
  • The value of comprehensiveness has clearly been on the rise. That’s been true for a couple of years, but it definitely is a trend that continued in 2016 and we expect to continue into 2017. You can see a bunch of examples of research in that area, including some from Whiteboard Friday itself.
  • Multi-device speed and user experience, Google’s been harping on this for several years now, and I think what we are observing is that speed is not the only user experience element. Google has taken action against overlays and pop-ups. They’ve taken action, clearly, that suggests that there are some engagement metrics that are going on there, and that sites that have better user experience and that garner better engagement are doing better in the search results.
  • We’ve seen a bunch of trends around unreliability of Google data. That includes search volume data. It includes data in AdWords, around Google showing you which keywords are in there. It includes inaccuracies in Google Search Console, formerly Webmaster Tools, around rankings. My colleague, Russ Jones, has just put out a big piece on that showing, essentially, that if Google says you got this many impressions and this many clicks, that may be totally wrong and false, so be cautious around that.
  • Voice search, clearly on the rise. Not yet a huge trend in terms of an addressable market that search marketers can go after, but we’ve talked a few ways here on Whiteboard Friday and at Moz about how you can think about voice search impacting your results in the future and what types of content you might want to produce to be in front of voice searchers.
  • Machine learning and deep learning, Google has clearly made a shift to that in the last 18 months, and we’re seeing it affect the search results in terms of how they’re considering links, how they’re looking at keyword searches, and how they’re looking at content.
  • Multi-visit buyer journeys have always been important, but I think we are now seeing the trend to where not just search marketers but marketers of all stripes recognize this, and a lot of us are optimizing for it, which means that the competitive landscape now demands that you optimize for a multi-visit buyer journey, that you don’t just consider a single visit in your conversion path or in your optimization path, and that means, for SEOs, considering what are all the queries someone might perform as they come to and come back to my site.
  • Bias to brands, that is a continuing trend over the last few years. We’re still seeing it, and we’re seeing it even more so. I would say we’re seeing it even when those brands have not necessarily earned tons of links, which used to be the big dominating factor in the world of is a brand stronger than a non-brand. A lot of times that was about links. Now it seems that those are decoupled.
  • That being said, we’re kind of feeling an undiminished value of links. If you’ve built a brand, if you’ve done a lot of these things successfully, links are certainly how you can stand out in the search results. That’s pretty much as true in 2016 and ’17 as it was in 2011 and 2012. Only caveat there is that the quality of links matters a lot more.

So, knowing all those things, I think we can now craft some very smart SEO tactics. We can apply those to the SEO problems we face.

II. Map your organizations top-level goals to how your SEO efforts can best assist:

Step two is to map your organization’s top-level goals to your SEO tactics, and that can look something like this.

Here’s Zow Corporate, the opposite of Moz, which is hopefully not very corporate. Zow Corporate’s big three for 2017, they want to grow revenue with new enterprise customers, they want to lower their costs to get more profitable, and they want to improve their upsell to existing customers. So SEO can help with these things by — and this is a really smart framework — you want to take the things that your organization wants to accomplish at its executive or board level, and you want to show that SEO is actually doing those things, not just that you’re trying to rank for keywords or bring more traffic, but that you’ve mapped your priorities in this way.

So I could say SEO can help by identifying searchers that enterprise targets and influencers perform and then ranking for those. We can lower our costs to get more profitable by reducing the cost per acquisition. We’ll drive more traffic with organic search, thus reducing our dependency on advertising and other forms of marketing that cost a lot more. Those types of things.

III. Build a keyword-to-content map

Step three is to build a keyword to content map. We talked about this here on Whiteboard Friday. I’d urge you to check that out if you haven’t already. But the basic concept is to have a list of terms and phrases that come out of your tactics and your goals, that you build a map for and then show like, “All right, here’s how we’re ranking today. Here’s the URL which we’re ranking with,” or, “We don’t yet have a URL that’s targeting this keyword phrase, and thus, we need to build it,” and then the action required there and what the priority is.

IV. Break down the SEO efforts into discrete projects with ETAs and people assigned, ordered by expected ROI

You can also think about adding some additional things to your content-to-keyword map or to your project list by breaking down all the SEO efforts that you’re going to do to hit all these goals into discrete projects with a few thingsan estimated time of delivery, the people who are assigned to it, and an ordering based on the expected return on investment. You can be wrong about this. It’s okay to be, “Hey, we’re taking our best guess, thumb in the air. We don’t really know for sure, but we’re going to try. Here’s the project. It’s link building for the home page. It’s our number-one priority. The value estimate is high because we currently rank number two or three for our own brand name. It’s assigned to this person, to Rand, and the ETA is March 30th.” Great, terrific, and now I know. I’ve taken this from here and from my projects list. It’s part of my goals. It’s where I think I can have a big impact. Terrific.

V. Build a reporting/measurement system that shows progress and ties revenue/goals to clear metrics:

Then, step five, the last one here is to build a reporting and measurement system that’s going to show progress, not just to you internally, but to your entire team, or to your client if you’re a consultant or an agency, and that anyone can look at and say, “Ah! This is where they’re going with this. This is how they’ve done so far.”

So you want to take any tactic or any project and add the metrics by which you will measure yourself. So if we’re trying to rank in the top three for our competitor comparison searches, Zow versus whatever companies Zow’s competing with, and the metrics there are ranking first, then search volume, the traffic we get from it, the conversions, and the retention of those customers who’ve come through, now you’ve got a real picture of how your SEO efforts map up to these big-picture goals. It’s a great way to frame your SEO.

So, with that being said, I am looking very much forward to hearing how you’re planning your 2017 SEO strategy. If you have recommendations and tips that you’d like to see here or questions, feel free to leave them in there, and despite the holiday break, I will be in there to answer your questions as best I can.

Look forward to joining you again next week and next year for a wonderful year of SEO and Whiteboard Fridays. Take care.

Video transcription by Speechpad.com

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from Raymond Castleberry Blog http://raymondcastleberry.blogspot.com/2016/12/how-to-craft-remarkable-seo-strategy.html
via http://raymondcastleberry.blogspot.com

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IER Statement on Obama’s Latest National Monument Designations

WASHINGTON – The Institute for Energy Research (IER) opposes today’s decision by President Obama to block off 1.65 million acres of land from energy development for the Bear’s Ears National Monument in Utah and Gold Butte National Monument in Nevada. IER spokesman Chris Warren issued the following statement:

“If this decision were in the interest of the American people, and not part of the president’s political agenda, then he would’ve done this years ago instead of in the eleventh hour of his presidency. These lands belong to the American people and should be used to their benefit, whether it’s for recreation or responsible energy development. The Obama administration clearly doesn’t have faith in the American people to be good stewards of their own lands.

“Fortunately, there is a path for the Trump administration to reset the Obama administration’s keep-it-in-the-ground agenda. According to a report by the Congressional Research Service, past presidents have reduced the size of national monuments. We encourage the Trump administration to take this first step and to ultimately work toward un-designating these areas altogether.”

 

###

The post IER Statement on Obama’s Latest National Monument Designations appeared first on IER.

from Raymond Castleberry Blog http://raymondcastleberry.blogspot.com/2016/12/ier-statement-on-obamas-latest-national.html
via http://raymondcastleberry.blogspot.com

IER Statement on Obama’s Latest National Monument Designations

WASHINGTON – The Institute for Energy Research (IER) opposes today’s decision by President Obama to block off 1.65 million acres of land from energy development for the Bear’s Ears National Monument in Utah and Gold Butte National Monument in Nevada. IER spokesman Chris Warren issued the following statement:

“If this decision were in the interest of the American people, and not part of the president’s political agenda, then he would’ve done this years ago instead of in the eleventh hour of his presidency. These lands belong to the American people and should be used to their benefit, whether it’s for recreation or responsible energy development. The Obama administration clearly doesn’t have faith in the American people to be good stewards of their own lands.

“Fortunately, there is a path for the Trump administration to reset the Obama administration’s keep-it-in-the-ground agenda. According to a report by the Congressional Research Service, past presidents have reduced the size of national monuments. We encourage the Trump administration to take this first step and to ultimately work toward un-designating these areas altogether.”

 

###

The post IER Statement on Obama’s Latest National Monument Designations appeared first on IER.

IER Statement on Obama’s Latest National Monument Designations

WASHINGTON – The Institute for Energy Research (IER) opposes today’s decision by President Obama to block off 1.65 million acres of land from energy development for the Bear’s Ears National Monument in Utah and Gold Butte National Monument in Nevada. IER spokesman Chris Warren issued the following statement:

“If this decision were in the interest of the American people, and not part of the president’s political agenda, then he would’ve done this years ago instead of in the eleventh hour of his presidency. These lands belong to the American people and should be used to their benefit, whether it’s for recreation or responsible energy development. The Obama administration clearly doesn’t have faith in the American people to be good stewards of their own lands.

“Fortunately, there is a path for the Trump administration to reset the Obama administration’s keep-it-in-the-ground agenda. According to a report by the Congressional Research Service, past presidents have reduced the size of national monuments. We encourage the Trump administration to take this first step and to ultimately work toward un-designating these areas altogether.”

 

###

The post IER Statement on Obama’s Latest National Monument Designations appeared first on IER.

How the Oil Price War Made U.S. Producers Even Stronger

OPEC, the cartel of oil producing countries, for years has been able to manipulate oil prices on the world market by controlling its level of oil output and oil exports. In 2008, oil prices hit a high of over $150 a barrel, which quickly prompted increased development of U.S. shale oil deposits. The renaissance that ensued from the use of hydraulic fracturing to produce oil in the United States resulted in an oversupply of oil on the market and helped to bring oil prices crashing down in the summer of 2014. OPEC thought its best strategy was to maintain market share, keep the price of oil low, and force the U.S. shale oil producers into oblivion. But, that did not happen. U.S. producers used their ingenuity to reduce operating costs and increase productivity enabling them to produce at lower cost. Now, OPEC realizes it must cut production to raise oil prices—much needed to keep their economies flourishing and their debt contained. Whether the production cuts, which go into effect on January 1, 2017, will have a lasting impact is yet to be seen.

Falling Cost of U.S. Shale Oil Production

In shale oil fields from Texas to North Dakota, production costs have roughly halved since 2014, when Saudi Arabia turned toward maintaining OPEC’s market share in an attempt to drive higher-cost shale producers out of the market. But, instead of killing the U.S. shale oil industry, the price war that ensued made shale oil a stronger rival. For example, in Dunn County, North Dakota, there are about 2,000 square miles where the cost to produce Bakken shale oil is $15 a barrel, which is about the same as Iran’s cost, and a little higher than that of Iraq. Dunn County produces about a fifth of the daily production in the state—about 200,000 barrels of oil a day. Improved technology and drilling techniques have boosted efficiency for the entire state and U.S. oil industry. On average, the breakeven cost per barrel to produce Bakken shale oil at the wellhead has fallen to $29.44 a barrel in 2016 from $59.03 a barrel in 2014. (See chart below.)[i]

Source: http://www.reuters.com/article/us-opec-meeting-usa-shale-idUSKBN13P0C8

The production costs of producing oil from shale oil basins in the United States are becoming competitive with Middle Eastern oil field costs as the chart below shows.

Source: http://www.reuters.com/article/us-opec-meeting-usa-shale-idUSKBN13P0C8

Bakken shale oil producers still need a substantially higher price than their breakeven cost to make a profit since they pay more to transport crude to market than producers in most other U.S. oil producing regions due to its distance from markets and the higher cost of rail shipments over pipeline shipments. International oil prices of $45 a barrel are enough for some Bakken producers to profit, while $55 a barrel would encourage production growth.

OPEC Agrees to Cut Production

OPEC has agreed to cut oil output by about 1.2 million barrels a day starting in January, reducing its combined production to 32.5 million barrels a day. The agreement exempted Nigeria and Libya, but gave Iraq its first quotas since the 1990s. Saudi Arabia will reduce output by 486,000 barrels a day to 10.058 million barrels a day and Iraq, OPEC’s second-largest producer, will cut production by 210,000 barrels a day. The United Arab Emirates and Kuwait will reduce output by 139,000 barrels a day and 131,000 a day, respectively. Non-OPEC members have agreed to cut production by 580,000 barrels per day, with Russia agreeing to cut by as much as 300,000 barrels a day “conditional on its technical abilities.”

The strength of the deal will depend on whether all parties adhere to their commitments. Saudi Arabia, the U.A.E. and Kuwait, have traditionally implemented their cuts, but some other OPEC members have not.[ii] The last two years have been painful for OPEC, earning $341 billion from oil exports this year, down from a record $920 billion in 2012—a loss of over 60 percent in 4 years.

OPEC’s announcement of the pending cuts has increased the price of crude oil. Brent crude oil is averaging around $55 a barrel. The increased price of oil has increased gasoline prices, which are now averaging over $2.20 a gallon for regular. As a rule of thumb, an increase of $10 a barrel for oil will increase gasoline prices by about $0.25 per gallon.

Whether oil prices will increase further depends on whether the production cuts are adhered to. How long they remain at higher levels will depend on how quickly U.S. oil producers can increase their production spurred by higher prices. On average, U.S. oil production is down about 850,000 barrels per day from the same time last year. Hydraulic fracturing is used to produce about half of the oil currently produced in the United States as the chart below shows.

Source: http://www.eia.gov/todayinenergy/detail.php?id=29252

OPEC Cuts Bring Opportunities to U.S. Producers

At the end of last year, the United States lifted a 40-year old ban on exporting U.S. crude oil. Since then, the U.S.’s non-Canadian oil exports have mainly gone to Europe. OPEC’s production cuts may open an opportunity for U.S. oil exports in Asia—a growing market. The more efficient drilling methods noted above may help U.S. producers to compete on price with OPEC producers.[iii] Some analysts believe the production cuts will lead to lower tanker rates and rising spreads between the U.S. benchmark crude and the Brent or Dubai crude prices. Estimates of tanker costs for next year show that a supertanker with capacity of 2 million barrels would earn an average of $25,000 a day–12 percent less than before OPEC pledged to cut production.[iv]

The U.S. is already exporting crude oil to Asian markets. Data from the Energy Information Administration show that U.S. crude oil exports reached a record-high in September of 692,000 barrels per day. In that month, exports to Singapore, for example, reached 99,000 barrels per day from 21,000 barrels per day in August and exports to South Korea were 59,000 barrels per day.

Conclusion

Oil markets have historically had their ups and downs. Despite many U.S. producers having to file for bankruptcy and many oil workers losing their jobs over the past two years as OPEC determined to maintain market share, U.S. producers used their ingenuity to slash production costs and improve productivity. Now, OPEC is planning to cut production, which has increased the price of crude oil and gasoline. Whether the production cuts will be maintained and prices will increase even more will likely be determined over the next six months.


[i] Reuters, Leaner and Meaner: U.S. shale greater threat to OPEC after oil price war, November 30, 2016, http://www.reuters.com/article/us-opec-meeting-usa-shale-idUSKBN13P0C8

[ii] Bloomberg, OPEC Confounds Skeptics, Agrees to First Oil Cuts in 8 Years, November 30, 2016, https://www.bloomberg.com/news/articles/2016-11-30/opec-agrees-to-cut-output-by-1-2-million-barrels-a-day

[iii] CNBC, OPEC just created a big opportunity for US oil companies: Exports to Asia, December 9, 2016, http://www.cnbc.com/2016/12/09/opec-output-cuts-make-us-exports-to-asia-possible.html

[iv] Oil Price, A Unique Opportunity: OPEC Cuts To Boost U.S. Shale Exports, December 14, 2016, http://oilprice.com/Energy/Crude-Oil/A-Unique-Opportunity-OPEC-Cuts-To-Boost-US-Shale-Exports.html

The post How the Oil Price War Made U.S. Producers Even Stronger appeared first on IER.

from Raymond Castleberry Blog http://raymondcastleberry.blogspot.com/2016/12/how-oil-price-war-made-us-producers.html
via http://raymondcastleberry.blogspot.com

How the Oil Price War Made U.S. Producers Even Stronger

OPEC, the cartel of oil producing countries, for years has been able to manipulate oil prices on the world market by controlling its level of oil output and oil exports. In 2008, oil prices hit a high of over $150 a barrel, which quickly prompted increased development of U.S. shale oil deposits. The renaissance that ensued from the use of hydraulic fracturing to produce oil in the United States resulted in an oversupply of oil on the market and helped to bring oil prices crashing down in the summer of 2014. OPEC thought its best strategy was to maintain market share, keep the price of oil low, and force the U.S. shale oil producers into oblivion. But, that did not happen. U.S. producers used their ingenuity to reduce operating costs and increase productivity enabling them to produce at lower cost. Now, OPEC realizes it must cut production to raise oil prices—much needed to keep their economies flourishing and their debt contained. Whether the production cuts, which go into effect on January 1, 2017, will have a lasting impact is yet to be seen.

Falling Cost of U.S. Shale Oil Production

In shale oil fields from Texas to North Dakota, production costs have roughly halved since 2014, when Saudi Arabia turned toward maintaining OPEC’s market share in an attempt to drive higher-cost shale producers out of the market. But, instead of killing the U.S. shale oil industry, the price war that ensued made shale oil a stronger rival. For example, in Dunn County, North Dakota, there are about 2,000 square miles where the cost to produce Bakken shale oil is $15 a barrel, which is about the same as Iran’s cost, and a little higher than that of Iraq. Dunn County produces about a fifth of the daily production in the state—about 200,000 barrels of oil a day. Improved technology and drilling techniques have boosted efficiency for the entire state and U.S. oil industry. On average, the breakeven cost per barrel to produce Bakken shale oil at the wellhead has fallen to $29.44 a barrel in 2016 from $59.03 a barrel in 2014. (See chart below.)[i]

Source: http://www.reuters.com/article/us-opec-meeting-usa-shale-idUSKBN13P0C8

The production costs of producing oil from shale oil basins in the United States are becoming competitive with Middle Eastern oil field costs as the chart below shows.

Source: http://www.reuters.com/article/us-opec-meeting-usa-shale-idUSKBN13P0C8

Bakken shale oil producers still need a substantially higher price than their breakeven cost to make a profit since they pay more to transport crude to market than producers in most other U.S. oil producing regions due to its distance from markets and the higher cost of rail shipments over pipeline shipments. International oil prices of $45 a barrel are enough for some Bakken producers to profit, while $55 a barrel would encourage production growth.

OPEC Agrees to Cut Production

OPEC has agreed to cut oil output by about 1.2 million barrels a day starting in January, reducing its combined production to 32.5 million barrels a day. The agreement exempted Nigeria and Libya, but gave Iraq its first quotas since the 1990s. Saudi Arabia will reduce output by 486,000 barrels a day to 10.058 million barrels a day and Iraq, OPEC’s second-largest producer, will cut production by 210,000 barrels a day. The United Arab Emirates and Kuwait will reduce output by 139,000 barrels a day and 131,000 a day, respectively. Non-OPEC members have agreed to cut production by 580,000 barrels per day, with Russia agreeing to cut by as much as 300,000 barrels a day “conditional on its technical abilities.”

The strength of the deal will depend on whether all parties adhere to their commitments. Saudi Arabia, the U.A.E. and Kuwait, have traditionally implemented their cuts, but some other OPEC members have not.[ii] The last two years have been painful for OPEC, earning $341 billion from oil exports this year, down from a record $920 billion in 2012—a loss of over 60 percent in 4 years.

OPEC’s announcement of the pending cuts has increased the price of crude oil. Brent crude oil is averaging around $55 a barrel. The increased price of oil has increased gasoline prices, which are now averaging over $2.20 a gallon for regular. As a rule of thumb, an increase of $10 a barrel for oil will increase gasoline prices by about $0.25 per gallon.

Whether oil prices will increase further depends on whether the production cuts are adhered to. How long they remain at higher levels will depend on how quickly U.S. oil producers can increase their production spurred by higher prices. On average, U.S. oil production is down about 850,000 barrels per day from the same time last year. Hydraulic fracturing is used to produce about half of the oil currently produced in the United States as the chart below shows.

Source: http://www.eia.gov/todayinenergy/detail.php?id=29252

OPEC Cuts Bring Opportunities to U.S. Producers

At the end of last year, the United States lifted a 40-year old ban on exporting U.S. crude oil. Since then, the U.S.’s non-Canadian oil exports have mainly gone to Europe. OPEC’s production cuts may open an opportunity for U.S. oil exports in Asia—a growing market. The more efficient drilling methods noted above may help U.S. producers to compete on price with OPEC producers.[iii] Some analysts believe the production cuts will lead to lower tanker rates and rising spreads between the U.S. benchmark crude and the Brent or Dubai crude prices. Estimates of tanker costs for next year show that a supertanker with capacity of 2 million barrels would earn an average of $25,000 a day–12 percent less than before OPEC pledged to cut production.[iv]

The U.S. is already exporting crude oil to Asian markets. Data from the Energy Information Administration show that U.S. crude oil exports reached a record-high in September of 692,000 barrels per day. In that month, exports to Singapore, for example, reached 99,000 barrels per day from 21,000 barrels per day in August and exports to South Korea were 59,000 barrels per day.

Conclusion

Oil markets have historically had their ups and downs. Despite many U.S. producers having to file for bankruptcy and many oil workers losing their jobs over the past two years as OPEC determined to maintain market share, U.S. producers used their ingenuity to slash production costs and improve productivity. Now, OPEC is planning to cut production, which has increased the price of crude oil and gasoline. Whether the production cuts will be maintained and prices will increase even more will likely be determined over the next six months.


[i] Reuters, Leaner and Meaner: U.S. shale greater threat to OPEC after oil price war, November 30, 2016, http://www.reuters.com/article/us-opec-meeting-usa-shale-idUSKBN13P0C8

[ii] Bloomberg, OPEC Confounds Skeptics, Agrees to First Oil Cuts in 8 Years, November 30, 2016, https://www.bloomberg.com/news/articles/2016-11-30/opec-agrees-to-cut-output-by-1-2-million-barrels-a-day

[iii] CNBC, OPEC just created a big opportunity for US oil companies: Exports to Asia, December 9, 2016, http://www.cnbc.com/2016/12/09/opec-output-cuts-make-us-exports-to-asia-possible.html

[iv] Oil Price, A Unique Opportunity: OPEC Cuts To Boost U.S. Shale Exports, December 14, 2016, http://oilprice.com/Energy/Crude-Oil/A-Unique-Opportunity-OPEC-Cuts-To-Boost-US-Shale-Exports.html

The post How the Oil Price War Made U.S. Producers Even Stronger appeared first on IER.

How the Oil Price War Made U.S. Producers Even Stronger

OPEC, the cartel of oil producing countries, for years has been able to manipulate oil prices on the world market by controlling its level of oil output and oil exports. In 2008, oil prices hit a high of over $150 a barrel, which quickly prompted increased development of U.S. shale oil deposits. The renaissance that ensued from the use of hydraulic fracturing to produce oil in the United States resulted in an oversupply of oil on the market and helped to bring oil prices crashing down in the summer of 2014. OPEC thought its best strategy was to maintain market share, keep the price of oil low, and force the U.S. shale oil producers into oblivion. But, that did not happen. U.S. producers used their ingenuity to reduce operating costs and increase productivity enabling them to produce at lower cost. Now, OPEC realizes it must cut production to raise oil prices—much needed to keep their economies flourishing and their debt contained. Whether the production cuts, which go into effect on January 1, 2017, will have a lasting impact is yet to be seen.

Falling Cost of U.S. Shale Oil Production

In shale oil fields from Texas to North Dakota, production costs have roughly halved since 2014, when Saudi Arabia turned toward maintaining OPEC’s market share in an attempt to drive higher-cost shale producers out of the market. But, instead of killing the U.S. shale oil industry, the price war that ensued made shale oil a stronger rival. For example, in Dunn County, North Dakota, there are about 2,000 square miles where the cost to produce Bakken shale oil is $15 a barrel, which is about the same as Iran’s cost, and a little higher than that of Iraq. Dunn County produces about a fifth of the daily production in the state—about 200,000 barrels of oil a day. Improved technology and drilling techniques have boosted efficiency for the entire state and U.S. oil industry. On average, the breakeven cost per barrel to produce Bakken shale oil at the wellhead has fallen to $29.44 a barrel in 2016 from $59.03 a barrel in 2014. (See chart below.)[i]

Source: http://www.reuters.com/article/us-opec-meeting-usa-shale-idUSKBN13P0C8

The production costs of producing oil from shale oil basins in the United States are becoming competitive with Middle Eastern oil field costs as the chart below shows.

Source: http://www.reuters.com/article/us-opec-meeting-usa-shale-idUSKBN13P0C8

Bakken shale oil producers still need a substantially higher price than their breakeven cost to make a profit since they pay more to transport crude to market than producers in most other U.S. oil producing regions due to its distance from markets and the higher cost of rail shipments over pipeline shipments. International oil prices of $45 a barrel are enough for some Bakken producers to profit, while $55 a barrel would encourage production growth.

OPEC Agrees to Cut Production

OPEC has agreed to cut oil output by about 1.2 million barrels a day starting in January, reducing its combined production to 32.5 million barrels a day. The agreement exempted Nigeria and Libya, but gave Iraq its first quotas since the 1990s. Saudi Arabia will reduce output by 486,000 barrels a day to 10.058 million barrels a day and Iraq, OPEC’s second-largest producer, will cut production by 210,000 barrels a day. The United Arab Emirates and Kuwait will reduce output by 139,000 barrels a day and 131,000 a day, respectively. Non-OPEC members have agreed to cut production by 580,000 barrels per day, with Russia agreeing to cut by as much as 300,000 barrels a day “conditional on its technical abilities.”

The strength of the deal will depend on whether all parties adhere to their commitments. Saudi Arabia, the U.A.E. and Kuwait, have traditionally implemented their cuts, but some other OPEC members have not.[ii] The last two years have been painful for OPEC, earning $341 billion from oil exports this year, down from a record $920 billion in 2012—a loss of over 60 percent in 4 years.

OPEC’s announcement of the pending cuts has increased the price of crude oil. Brent crude oil is averaging around $55 a barrel. The increased price of oil has increased gasoline prices, which are now averaging over $2.20 a gallon for regular. As a rule of thumb, an increase of $10 a barrel for oil will increase gasoline prices by about $0.25 per gallon.

Whether oil prices will increase further depends on whether the production cuts are adhered to. How long they remain at higher levels will depend on how quickly U.S. oil producers can increase their production spurred by higher prices. On average, U.S. oil production is down about 850,000 barrels per day from the same time last year. Hydraulic fracturing is used to produce about half of the oil currently produced in the United States as the chart below shows.

Source: http://www.eia.gov/todayinenergy/detail.php?id=29252

OPEC Cuts Bring Opportunities to U.S. Producers

At the end of last year, the United States lifted a 40-year old ban on exporting U.S. crude oil. Since then, the U.S.’s non-Canadian oil exports have mainly gone to Europe. OPEC’s production cuts may open an opportunity for U.S. oil exports in Asia—a growing market. The more efficient drilling methods noted above may help U.S. producers to compete on price with OPEC producers.[iii] Some analysts believe the production cuts will lead to lower tanker rates and rising spreads between the U.S. benchmark crude and the Brent or Dubai crude prices. Estimates of tanker costs for next year show that a supertanker with capacity of 2 million barrels would earn an average of $25,000 a day–12 percent less than before OPEC pledged to cut production.[iv]

The U.S. is already exporting crude oil to Asian markets. Data from the Energy Information Administration show that U.S. crude oil exports reached a record-high in September of 692,000 barrels per day. In that month, exports to Singapore, for example, reached 99,000 barrels per day from 21,000 barrels per day in August and exports to South Korea were 59,000 barrels per day.

Conclusion

Oil markets have historically had their ups and downs. Despite many U.S. producers having to file for bankruptcy and many oil workers losing their jobs over the past two years as OPEC determined to maintain market share, U.S. producers used their ingenuity to slash production costs and improve productivity. Now, OPEC is planning to cut production, which has increased the price of crude oil and gasoline. Whether the production cuts will be maintained and prices will increase even more will likely be determined over the next six months.


[i] Reuters, Leaner and Meaner: U.S. shale greater threat to OPEC after oil price war, November 30, 2016, http://www.reuters.com/article/us-opec-meeting-usa-shale-idUSKBN13P0C8

[ii] Bloomberg, OPEC Confounds Skeptics, Agrees to First Oil Cuts in 8 Years, November 30, 2016, https://www.bloomberg.com/news/articles/2016-11-30/opec-agrees-to-cut-output-by-1-2-million-barrels-a-day

[iii] CNBC, OPEC just created a big opportunity for US oil companies: Exports to Asia, December 9, 2016, http://www.cnbc.com/2016/12/09/opec-output-cuts-make-us-exports-to-asia-possible.html

[iv] Oil Price, A Unique Opportunity: OPEC Cuts To Boost U.S. Shale Exports, December 14, 2016, http://oilprice.com/Energy/Crude-Oil/A-Unique-Opportunity-OPEC-Cuts-To-Boost-US-Shale-Exports.html

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