OPEC might get the last laugh on oil........

NEW YORK (MarketWatch) — For most Americans, OPEC’s seeming impotence in the face of collapsing oil prices is a reason to rejoice. So enjoy the cheap gas, for now. But don’t get too euphoric.

Even though collapsing oil prices CLF5, -9.12%  promises near-term pain for many cartel members, the decision to stand pat looks like the smarter long-term strategy.

Veteran energy economist James Williams of WTRG Economics boils down the dilemma facing OPEC oil ministers as a question of whether to endure short-term pain for longer-term gain.

The debate, he said, comes down to this: “Am I willing to tolerate lower oil prices for a period, improve the world economy, and therefore increase customers and at the same time slow U.S. production growth, or do I want the money in my pocket today at the almost certainty of losing market share?”

It would be wrong to assume that OPEC is toothless. Had the cartel agreed to make substantial cuts, and shown enough unity to make them stick, oil would be shooting back toward $100 a barrel, energy analysts say.

For Williams, the situation is reminiscent of the aftermath of the 1978-79 oil shock that followed the Iranian revolution and the start of the Iran-Iraq war. That’s when Saudi Arabia’s powerful oil minister and OPEC chief, Sheikh Amad Zaki Yamani, warned fellow cartel members that sky-high oil prices would eventually undermine demand. See: A brief, wondrous history of OPEC landmark events.

In addition to hobbling world economic growth, the prices encouraged more exploration. More oil from the North Sea, Russia, Alaska and elsewhere came online. Meanwhile, U.S. oil consumption cratered, plunging 19% between 1978 and 1983, Williams notes. It wasn’t until 1998 that U.S. oil consumption returned to 1978 levels.

If oil pushed back toward $100 a barrel, OPEC would only see its market share continue to slide, Williams said. The shale revolution has seen U.S. oil production surge, growing at a clip of around 1 million barrels a day annually for the past several years. That’s roughly equal with demand growth.

While analysts debate exactly where the pain point lies for U.S. shale producers, Williams emphasizes that production from shale wells declines rapidly, particularly compared to deep-sea and other types of production. That means a period of low prices should help ensure that OPEC maintains, or even increases, market share over the long run.

Indeed, energy analyst Greg Pardy of RBC Capital Markets notes that unlike the three previous oil-price drops over the past 16 years, oil demand hasn’t fallen apart.

So, if demand is still growing, the question for OPEC is what to do about the current glut. It seems clear that Saudi Arabia wants to make sure that non-OPEC countries share the burden when it comes to working down supply.

“Markets will now switch their attention to U.S. majors and expect them to reduce their [capital expenditures] budgets so as to slow the supply and put a floor below the tumbling prices,” said William Featherstone, oil and gas equity strategist at UBS, in a note.

That said, OPEC countries have grown accustomed to oil near $100 a barrel. Most require higher oil prices to balance their budgets, leaving some, such as Venezuela, more vulnerable to political and social unrest.

Featherstone estimates that a cut in U.S. oil capital spending wouldn’t begin to cut into supply growth until the second half of 2015. He estimates that a 15% cut would reduce year-on-year U.S. production growth from 1 million barrels a day to 500,000 barrels a day in 2016.