Ali Jarekji / Courtesy Reuters A gas flame is seen in the desert near the Khurais oilfield, near Riyadh, June 2008.

Saving OPEC

How Oil Producers Can Counteract the Global Decline in Demand

Despite a steep drop in oil prices, OPEC decided in November not to decrease production, sending the price of crude oil to a five-year low. The decision was unwelcome among some members of the cartel. OPEC has been feeling the heat from rising shale production in Texas, North Dakota, and other places in North America. Venezuela and Iran wanted to cut output, in hopes of raising prices. But decision-makers in Saudi Arabia, OPEC’s most influential member, decided to defend the group’s market share, even if at a cost.

If shale were the only problem, Saudi Arabia’s strategy might work. But OPEC also faces a larger, more fundamental threat: waning global demand for oil. Demand in industrialized countries fell from 50.1 million barrels per day in 2005 to 45.5 million barrels per day in 2013. Since the decline predated the beginning of the global recession, the shift is likely a result of long-term structural changes in the oil market, such as increased energy efficiency, and not just slow growth.

The International Energy Agency expects the decline in oil demand from the industrialized world to be more than offset by a rapidly increasing demand for energy in the developing world, most notably in China and India. As a result, the agency expects global oil demand to grow until 2040. But many experts say that global oil demand will peak even sooner than that, citing fuel switching, the removal of oil subsidies, and increased energy efficiency. Citigroup, for example, forecasts that oil demand will level off by 2020.

If Citigroup is right, the members of OPEC, whose economies hinge on export revenues from crude oil, are in trouble. But OPEC countries can pursue at least four different strategies to counteract the decline in demand—although none of them will be easy, and none guarantees success.

BETTER TOGETHER

To bring prices up, major oil exporters could first work together to try to reduce global oil supply. But, historically, this sort of collective action has been difficult. Although OPEC

Loading, please wait...

Related Articles

This site uses cookies to improve your user experience. Click here to learn more.

Continue