Michael Giberson
No doubt consumers think oil prices are too high. For the moment I’m wondering if oil prices are too high even for OPEC.
High prices induce a number of adjustments, some of which have long term repercussions. Last time there was an oil price shock at all comparable to the present was around 1979-1981, when world oil prices reached near $100 (in $2008). High prices then helped support continued growth in non-OPEC oil supply (which really got started during the oil crisis of 1973) and spurred substantial consumer interest and investment in energy efficiency. Over time the adjustments contributed to a nearly 20-year long period (roughly 1986-2004) of prices below 1973 prices in real terms.
Additional evidence comes from a paper, “OPEC’s Demand Curve,” by Marc Vatter. Vatter estimates world demand for oil, the effect of oil prices on world income, and non-OPEC supply in order to calculate the net demand for oil faced by OPEC. Vatter suggests that while oil price shocks can be profitable for OPEC – no surprise there – to the extent consumers and non-OPEC suppliers see the price increases as long lasting, they make adjustments which reduce OPEC’s income in the longer term.
Most of the article itself is focused on explaining and defending various statistical assumptions and devices employed in the process of generating his estimates of supply and demand, but even a non-specialist reader may benefit from scanning the article. He sums up his estimates by saying, “we should not expect prices to fall below [$81 a barrel in $2008] for long” given current non-OPEC supply and world oil consumption. Below $81 a barrel, OPEC net income falls.
Vatter doesn’t explicitly peg the upper end of OPEC’s desired oil price range, and possibly the recent economic growth around the world – most obvious in China and India – makes his data analysis over the period 1974 to 2005 less than dispositive, but I would guess a price above $100 in real terms reduces the net present value of long term income for OPEC nations.
If real prices fall below $80 in the next few years and stay below $80 for a while, that will be reason to believe that oil prices now were too high even for OPEC.