Potential Global Economic Impact of OPEC's Oil Production Freeze

Zekarias Hussein, Deepika Wadhwa, Badri Narayanan and Muhammad Aamir Khan

No 330177, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: World oil prices have been depressed for more than two years because of the global oil supply glut. After reaching their peak in mid 2014 and trading at over $100 a barrel, oil prices went into a free fall later that year and briefly plunged below $30 per barrel in early 2016. However, this glut of global oil supply has not only suppressed energy prices but also increased tensions between members Saudi Arabia, Iran and Iraq. OPEC members, seeking to bolster oil prices, have recently agreed to slash production by 1.2 million barrels per day (bpd) or about 1 percent of global output. The production decline agreement effective Jan 1, 2017 is for six months, with the possibility of another six-month extension. Expectation of OPEC action and improving fundamentals lifted oil prices to an average of $43 per barrel towards the end of 2016. There is optimism in the markets that these output cuts could tend to push up oil prices. However, some skeptics believe that there could be increased output from Libya and Nigeria, which could push OPEC’s production beyond the overall quota, and also that OPEC and non-OPEC countries past track record is poor in complying with the quota commitment. Moreover, latest inventory report published by the U.S. Energy Information Administration (EIA) implied oversupply as its crude stocks increased by 4.1 million barrels reaching to 483.1 million barrels. Given these uncertainties about the supply shifts, both now and in the future, it would, therefore, be interesting to analyze their effect on global oil prices. In order to quantify the impact of these supply changes; the paper employs the GTAP-E-Power model since it is a detailed framework capturing all energy sources comprehensively. We are able to assess the impact of oil production cuts on renewable sectors and CO2 emissions as well.

Keywords: International Relations/Trade; Resource/Energy Economics and Policy (search for similar items in EconPapers)
Pages: 6
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:330177

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