For months, OPEC has been attempting to put a floor under the price of oil, with little success. Last week the countries of OPEC renewed their commitment to this goal by extending production cuts an additional 9 months. Recognizing their inability to do this alone, OPEC brought in Russia and a host of smaller players in the oil production market. The main player’s motivation for this effort is obvious, next year the Russian elections take place and the Saudi Arabian oil IPO, Armco comes out. What is less obvious to some people, is that all of this could be an exercise in futility.

The price of a commodity is dictated by supply and demand. This is a fundamental rule of economics and too much or to little of one or the other will always bring about a dramatic change in the price of the commodity. OPEC is attempting to reduce by 1.8 million bpd which is around 2% of the total global production of oil and hoping to reshape the market with this. What these suppliers are ignoring is the fact that it is very possible demand for oil will drop at a rate which will make this drop in supply irrelevant.

The United States and the People’s Republic of China are the two largest consumers of oil in the world together using in excess of 30 million barrels of oil per day. This monstrous level of consumption is nearly the amount which all the countries of OPEC produce combined. Most of the nearly 20 million barrels of oil United States consumes daily are provided either through its domestic production or by its neighbors, mainly Canada but also Mexico. China on the other hand is both Russia and OPEC’s biggest customer.

A slow down in the economy of either country but especially China will dramatically change the global demand for oil and make the supply side production cuts irrelevant. So while suppliers making plans to dictate prices is all well and good, the market would do well to remember that is only half the equation.