Article: How much influence does OPEC have on global oil prices?

Organization of Petroleum exporting countries LogoIn the short term, the Organization of Petroleum-Exporting Countries (OPEC) has significant influence on the price of oil. Over the long term, its ability to influence the price of oil is quite limited, primarily because individual countries have different incentives than OPEC as a whole.

For example, if OPEC countries are unsatisfied with the price of oil, it is in their interests to cut the supply of oil so prices rise. However, no individual country actually wants to reduce supply, as this would mean reduced revenues. Ideally, they want the price of oil to rise while they raise revenues. This issue often arises as OPEC pledges to cut supply, causing an immediate spike in the price of oil. Over time, the price moves lower when supply is not meaningfully cut.

On the other hand, OPEC can decide to increase supply. On June 21, 2018, OPEC met in Vienna and announced that they would be increasing supply. A big reason for this is because of the extremely low output by fellow OPEC member Venezuela. Russia and Saudi Arabia are big proponents of increasing supply while Iran is not. 

In the end, the forces of supply and demand determine the price equilibrium, although OPEC announcements can temporarily affect the price of oil by altering expectations. One case where OPEC’s expectations would be altered is when its share of world oil production declines, with new production coming from outside nations such as the U.S. and Canada.

Brent Crude oil, as of June 2018, costs $74 per barrel while WTI Crude oil costs $67 per barrel —a vast improvement from post-oil crisis conditions in 2014-15, when oversupply caused prices to fall as low as $40-$50 per barrel. Oil price fluctuations created huge incentives for innovation in new production techniques that led to oil extraction and more effective drilling methods.

Reference: Investopedia

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