OPEC has agreed to cut oil production by 1.2
million barrels a day, and yet the price of oil still fell. Some say it’s because traders
don’t expect OPEC members to adhere to the cut. Equally, however, it could be
argued that OPEC reduced oil quotas because it knew the price of oil was going to fall
anyway. In the long term, OPEC is not served well by a high oil price: it will
encourage the world to look for alternative sources of supply, and alternative forms of
energy.
Back in the early ’80s they used to say the demand for oil was actually quite
elastic in the long run. What they meant was in the short run it was inelastic,
meaning oil producers could charge what they wanted and demand would stay the
same, but in the long term, higher price led to lower demand. And it would seem
that principle is still true today, and OPEC knows it.
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