Oil prices are up 8.6% after OPEC surprised everyone by agreeing to a deal

Obsession
Energy Shocks
Obsession
Energy Shocks

OPEC—the floundering oil cartel left for dead after two years of bluster and no action—today flummoxed markets by mustering the will to make a massive cut in oil production and shore up its fiscally strapped member countries. Oil traders sent up the price of the international benchmark Brent crude well over $50 a barrel, a rise of as much as 8.6%.

The cartel, which seemed the most powerful organization on the planet during the 1970s, announced that it will reduce its production to 32.5 million barrels a day, a cut of 1.2 million barrels. Saudi Arabia’s oil minister also said that non-OPEC members will follow with cuts of another 600,000 barrels a day, making the total reduction 2 million barrels, or about 2% of global supply.

To the degree that the often-fractious cartel and non-members such as Russia follow through, the decision seems likely to draw a line under two years of extraordinary turbulence in oil. Over an 18-month period starting in June 2014, oil prices plunged from about $115 a barrel to about $28. The plummet has shaken the OPEC countries, which rely on oil revenue for the large majority of their state budgets, in particular the social spending that ensures political stability. Oil prices seem likely to settle at or above $50 a barrel for some time now.

Nonetheless, the cut won’t revive OPEC’s glory days. Many experts think that oil demand is heading for a peak over the next decade, then a long decline for the rest of the century.

That view won’t change regardless of any actions on climate change by the new, climate-skeptical Trump administration coming to power in the US in January. It’s because the US, European and Chinese economies are moving away from energy-intensive industries and likely to push the use of electric cars.

Moreover, countries such as China and India may consume less oil than previously expected because of their awful air pollution. To curb public discontent with dirty air, the governments of both countries are expected to seek ways to tamp down the purchase and use of gasoline- and diesel-fueled cars, and to encourage motorists to buy and drive electrics.

This does not mean that, despite what they say, anyone knows where prices will go. The current consensus is that prices will remain in the $45- to $60-a-barrel range through the end of next year, and not return at all to the $100-a-barrel levels that prevailed prior to the arrival of US shale oil in 2011.

Such forecasts may underestimate future prices because of an expected supply crunch. Oil companies made enormous cuts in exploration spending during the last 18 months and oil shortages are forecast by the end of the decade.

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