An Inconvenient Truth About OPEC

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"OPEC won't be able to meet the world's energy needs."

The IEA, OPEC and the EIA—along with oil companies and consulting firms, believe OPEC will reconcile predicted global demand and non-OPEC supply. But they are wrong—OPEC output will not meet such projections because they are based on flawed and outdated forecasting models.

In forecasts that carry forward to the 2030s, all three organizations believe world energy demand will increase (of which developing countries will account for most) and that fossil fuel will remain dominant. They also agree that dependence on OPEC oil will increase as non-OPEC oil resources dwindle and become more expensive to extract. But a major flaw in modeling world oil markets makes these forecasts as unrealistic as a projection that humans will land on Mars tomorrow.

Current forecasting models project world oil demand based on variables, such as economic growth (or income), oil prices, oil-substitute prices and past demand. They also project non-OPEC output using variables like oil prices, production costs and past supply. But, after forecasting world demand and non-OPEC supply, these models simply assume OPEC will supply the rest—without taking into account OPEC behavior or that OPEC members might be unwilling or unable to meet the 'residual' demand. For this reason, these models estimate what is known as the 'call on OPEC'—the difference between estimated world demand and estimated non-OPEC supply.

The idea to model the 'call on OPEC' gained ground after the oil embargo of 1973, a time when few economists were familiar with the oil market. The magnitude of the energy crisis attracted economists from a wide array of specialties. To diagnose the problem, they opened their toolkits and used what was available. If the supply/demand model didn't work, then the monopoly model would.

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