OPEC Output Cut: Is The Decision To Cap Oil Production Based On A Possible Miscalculation?

Last month, the Organization Of Oil Exporting Countries (OPEC) had agreed to cut the production of crude oil by around 700,000 barrels a day for the first time since 2008. Now, a report from the World Economic Forum challenges the very assumption based on which the decision was taken.

During the talks that were held in Algiers, on the sidelines of the International Energy Forum meet, it was assumed that the demand for oil will continue to grow over the coming decades as developing economies such as India, China and Brazil will continue to consume large amounts to fuel their industrial sector.

The decision to cap the production was taken in order to reduce the amount of crude oil available in the market at any particular time, thereby conflating the demand-supply ratio. This, in turn, would help raise the price of oil in the market. While this certainly worked and would continue to, the decision may be at odds with long-term industry trends.

According to this report, the demand of crude oil in the international market will hit a record high by 2030, beyond which it will start to decline at a rapid rate. According to Bloomberg,” If rapid adoption of new technology and business models disrupts the existing system, demand could peak in 2030 at 103 million barrels a day, compared with about 86 million in 2014, and decline by 0.9 percent a year to 80 million in 2060.”

The decline in demand will be a direct result of increasing sources of renewable sources, use of electric vehicles and other disruptive technologies.

The fall in demand will affect economies, such and Saudi Arabia, that solely depend upon oil production. Capping production, while they discover new oil deposits, will prevent these countries unleash their production potential, keeping their oil reserves largely unchanged. Large stocks of oil, with demand decreasing beyond 2030, will prove disastrous for the market.

Here is what the report says:

The full report is available here.