Over the past three days, the Wuhan coronavirus panic has caused the oil market – along with countless others – to nosedive.

But I’m not expecting crude to rebound sharply with the others…

The reason? It goes back to how the U.S. innovated its way into oil independence – and drove OPEC to the brink.

Leaving OPEC in the Dust

For decades, OPEC controlled world oil prices. The U.S. had to import nearly all of its crude oil.

From 2000 through 2010, U.S. crude oil production averaged only about 5.5 million barrels per day (bpd).

But at about the same time, U.S. petroleum engineers developed a new technology. It radically changed the world oil picture.

And it’s helping the U.S. drive OPEC out of the oil business.

The technology I’m talking about is hydraulic fracking combined with horizontal drilling.

It was immediately adopted by oil and gas exploration and production (E&P) companies. This gave them the ability to economically extract oil and gas from oil shale deposits.

Fast-forward to February 2020 and U.S. crude oil production has nearly tripled to 13 million bpd.

Production continues to increase due to the explosive growth of unconventional drilling in oil shale deposits.

It’s giving OPEC members and Russia fits. All of these countries have one thing in common: Most of their revenues come from crude oil sales.

Unfortunately for them, U.S. crude oil production and exports continue to grow. U.S. E&P companies can produce crude oil cheaper than most OPEC members can.

More crude oil on the global market means prices haven’t risen as much as OPEC and Russia intended.

In fact, they’ve done just the opposite: They’ve fallen.

Dialing Back

Last December, OPEC met in Vienna. Its members voted to slash production.

They agreed to dial back 500,000 bpd until the end of March 2020. In total, OPEC has reduced production by roughly 1.5 to 1.6 million bpd due to overcompliance by Saudi Arabia.

Russia and some of the OPEC members have cheated and overproduced. So Saudi Arabia has tried to compensate for the bad actors.

As part of the most recent agreement, it’s cutting its production by an additional 400,000 bpd, putting OPEC’s total supply cuts at or near 2.1 million bpd.

One would expect that these cuts would cause a marked increase in crude oil prices.

But that hasn’t happened. Crude oil prices have fallen since OPEC put the additional cuts in place.

West Texas Intermediate and Brent crude prices are down 11.9% and 13.8%, respectively, over a three-month period. The main culprit is a sharp drop in Chinese oil demand. Chinese crude oil demand is down 20% as 750 million workers are in some form of quarantine due to the coronavirus.

Is it a black swan event? I think so.

And it means OPEC and Russia are going to have to cut production even more.

But the plot thickens: Saudi Arabia is now thinking of telling Russia that its production alliance is over.

At the same time, it is talking to Kuwait and the United Arab Emirates about forming a new one. Together, the three producers may agree to cut production by an additional 300,000 bpd.

Remember, they aren’t just fighting the effects of a drop in demand from the coronavirus lockdown in China. They are also fighting the increase in production in the U.S.

This year, the Energy Information Administration is forecasting U.S. crude oil production will hit 13.2 million bpd. Next year, it expects U.S. producers will reach 13.6 million bpd.

I think U.S. production will hit 14 million bpd by the end of next year.

Our additional production keeps eating into any cuts OPEC agrees to make. Which means U.S. E&P companies are slowly driving OPEC out of the oil business.

What Now?

What happens next? Short term, it’s all about the coronavirus.

Long term, demand for oil is slowing much faster than current estimates. The electrification of the transportation network is slowly reducing the demand for petroleum-based fuels.

And with increasing crude oil production from low-cost horizontal wells, the U.S. is quickly becoming the tail-wagging dog in the oil sector.

For investors, it’s a strong signal to “follow the money.” And I don’t mean into the oil sector. I mean out of oil and gas and into renewable energy.

It’s where the institutional money, venture capitalists and other large investment pools are headed.

You should too.

Good investing,

Dave