OPEC’s secretary general has asked U.S. shale oil producers to cooperate with the cartel to keep the global oil market out of an oversupply situation. That betrays a fundamental misunderstanding of how the U.S. oil industry works.

Last week some comments from OPEC Secretary General Mohammed Barkindo signaled that OPEC may not understand how the U.S. oil industry functions.

Reuters reports that Barkindo urged cooperation from U.S. shale oil producers to help keep the global oil market out of an oversupply situation. Barkindo stated, “We urge our friends, in the shale basins of North America to take this shared responsibility with all seriousness it deserves, as one of the key lessons learnt from the current unique supply-driven cycle.”

Shale Producers Are Not A Cartel

But the U.S. oil industry is nothing like OPEC. In 2016, the 14 member countries of OPEC produced nearly 43% of the world’s oil. The cartel also controls 71.5% of the world’s oil reserves.

In comparison, the U.S. produced 13.4% of the world’s oil last year. That’s significantly more than any OPEC member except Saudi Arabia, but there are thousands of companies, each acting in its self-interest, responsible for U.S. oil production. In Saudi Arabia, one company — Saudi Aramco — was responsible for as much production as all U.S. producers combined.

Each of the U.S. producers acting individually can only impact a fraction of a percentage of the world oil market. Without significant collusion, U.S. oil producers just can’t affect the global oil balance in the way OPEC seems to think they can.

Yes, by increasing production — particularly shale oil production — the U.S. has added to the global oil glut. But there is no mechanism by which they can (legally) restrict production to benefit all producers. Production restrictions in the U.S. are a function of the collective decisions of those thousands of oil producers, based on their outlook for oil prices.

That’s a different situation than with OPEC. It is possible for OPEC to agree to collectively cut a million barrels a day of production (which would be about 2.5% of the group’s 2016 production), but virtually impossible (and in fact illegal) for U.S. producers to collude in the same fashion.

OPEC’s No-Win Strategy

The rationale OPEC gave when it decided to defend market share in 2014 was that it wasn’t fair that their production restraint was helping prop up the highest-cost producers (i.e., marginal shale oil producers).

This is a valid argument. In most businesses, high-cost producers tend to get squeezed out of the market. OPEC was, in fact, propping up these producers by restraining production and helping maintain elevated oil prices.

But fair or not, there were real consequences to OPEC’s strategy. They squeezed a few high-cost shale producers out of the market, but oil prices have dropped by more than 50% from the first half of 2014. Attempting to make things “fair,” in my opinion, was a Trillion Dollar Miscalculation on OPEC’s part.

The comments from the Secretary General may just mean that OPEC is hedging its bets. In its newly released Monthly Oil Market Report, the cartel has again raised its demand forecast for 2018. That is the third consecutive upward revision in OPEC’s 2018 demand forecast. The report even raised the possibility of a global supply deficit in 2018 unless oil output is increased.

Self-serving? Yes, but probably accurate. And U.S. shale oil producers stand to benefit.