Will Oil Spike up If OPEC Cuts Down?

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Deep ocean oil rig production platform
Deep ocean oil rig production platform
Deep ocean oil rig production platform

According to the Bank for Internation standards (BIS), the real culprit behind oil’s 60% drop in price is the Saudi Arabian-dominated OPEC. According to BIS, OPEC’s November decision to keep its oil taps flowing is the main reason why the global price of oil crashed. It is not the softening demand and it is not overproduction in the United States. It is all on OPEC’s shoulders, according to the BIS.

The problem with this conclusion is that it doesn’t answer a key question that needs to be asked. What if OPEC does cut back on its production? What do you think will happen to the price of oil? A lot of people are thinking that the price of oil will spike back up to $100 per barrel and more. This is a pipe dream. Seriously. While this might be true for a few weeks and even a few months, there would be so much downward pressure from the existing supplies out there. I am, of course, talking about Canadian tar sands and North American shale.

North American shale operations are very easy to revive. Right now, there are a lot of weak shale oil fields that are being shut in. However, once oil starts to spike again, those fields can be reactivated and oil can get pumping again. As much as it may be a rude shock for international standards, the fact remains that there is a supply cap for oil. There is a certain price point where once oil crosses it, all these supply options come roaring back into production and start putting downward pressure on the price of oil. Also, in light of all these, it is worth mentioning that the global demand for oil isn’t growing as much as before.

Put all these factors together and it is highly unlikely that, even if OPEC were to change its mind, oil will go back to its previous price levels. Outside of a temporary spike, the downward decline will continue. The reality is that global consumption and production patterns have changed. It is going to take more than OPEN decisions to reverse those changes.

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