Opec's Dilemma: Price or Volume Objectives

Strategic Insights -

As oil ministers meet in January, they face a critical decision: supporting prices at $25/bl or expanding their market share. However, pursuing both objectives may be mutually exclusive, as cutting output to boost prices could erode demand, particularly in a slowing global economy. This decision will have far-reaching implications for the oil market, the global economy, and the future of energy production.

Key Takeaways:

  • The International Energy Agency (IEA) projects that Opec output could more than double by 2020 to over 60mn b/d, with an average annual rise of 1.5mn b/d.
  • If Opec aims to support prices at $25/bl, it must maintain a perpetual shortage to force the market to clear at a high price, which curbs demand by limiting potential buyers.
  • High oil prices have already halved the IEA's estimate of global demand growth in 2000 from 1.8mn b/d to 900,000 b/d, reflecting the impact of high prices, which transferred nearly $300bn from consumers to producers.
  • Prices far above production costs are an economic distortion that misallocates resources, imposing a tax on efficient free market economies such as the US and sheltering bad practice in producing countries.
  • High oil prices direct investment towards reducing oil consumption, when the capital could instead be used to raise Opec's capacity and benefit from its reserves.

Statistics:

  • The average oil price in 2000 was over $10/bl more than in the year before, transferring nearly $300bn from consumers to producers.
  • The IEA has halved its estimate of global demand growth in 2000 from 1.8mn b/d to 900,000 b/d.
  • Opec output could more than double by 2020 to over 60mn b/d, with an average annual rise of 1.5mn b/d.

Sources:

  • International Energy Agency (IEA)
  • US Federal Reserve Chairman Alan Greenspan (in early December)
  • Stanley Kubrick's film 2001: A Space Odyssey
  • Oil market data and trends ( Market markers )