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OPEC’s market power to diminish for three key reasons

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Assuming that OPEC remains intact, its market power will diminish for three key reasons. reports citing UK-based Capital Economics research and consulting company.

"First, we forecast that US oil production will continue to rise helped by the addition of new pipeline and export infrastructure, as well as the falling cost of US shale technology. As a result, the market share and pricing power of US producers will continue to increase," the company said in its report.

Second, battery prices are falling rapidly, and Capital Economics suspects that they will decline further in the years ahead.

"Consequently, electric battery-based vehicles will become cheaper and significantly more popular. As such, oil consumption by the road transport sector, by far the most important source of oil demand, will enter a long-term structural decline," said the company.

"Elsewhere, demand from other sectors is also likely to peak relatively soon, particularly in aviation and electricity generation, as ongoing efforts to tackle carbon pollution continue."

Third, as demand diminishes, prices are likely to come under downwards pressure, according to Capital Economics.

"This will presumably incentivise many countries within OPEC to cheat on their quotas before then. After all, most OPEC countries still have decades worth of oil reserves left, which they would presumably want to drill now while demand is still relatively strong."

"Admittedly, it is plausible that OPEC will survive, since most OPEC members have a lower-cost base than countries outside the organisation. However, prices would presumably be restricted as too high a price would incentivise market entrants."

2019.09.02 / 22:14
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