For the longest time Reddit was predominantly the latter group of power users but in recent years Reddit has had a mass influx of the former casual group of users. I think the bet that Reddit is making is that the latter group is much smaller than the former and cutting off API access won't make a significant difference. But if they are wrong, this could well be the end of Reddit, going just like Digg went. It will likely still exist, but as a shell of it's former self.
I can’t imagine this killing reddit, not at all, but I think the power users and moderators are important to what makes reddit reddit and that without them the quality will decline quite a lot.