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OPEC’s Control on Oil Prices

How does OPEC control oil prices?

Organization of the Petroleum Exporting Countries (OPEC), remains an important force behind the oil prices globally. There are several mechanisms through which it can influence the prices of oil. However, primarily it is its control over its member countries that allows the organization to influence the prices. It sets production targets for its members to manage the oil production. Historically whenever OPEC has reduced its production targets there has been a corresponding rise in oil prices due to low supply and high demand. The OPEC nations are accountable for more than 40 percent of the oil supply worldwide. Another important factor is that 60% of the oil traded internationally comes from the oil exporting OPEC nations. It is also the huge market share of OPEC in the oil market that gives it a major control over the oil prices.

Saudi Arabia is one of the biggest producers in the OPEC.  Particularly changes in its crude oil production level get to affect the prices internationally.  A third important factor is spare capacity which is highest for Saudi Arabia. Apart from being the largest oil producer in OPEC, Saudi Arabia also has the largest spare capacity. 1.5 to 2 million barrels a day of spare capacity gives Saudi Arabia some extra control over the oil market and prices.  The spare capacity of OPEC is also an indicator of the ability of the oil market to respond to the situations of oil crises. The spare production levels of OPEC remained low from 2003 to 2008 due to which its capacity to respond to demand and price rises was reduced. Moreover, the geopolitical events taking place in the OPEC countries also have a major influence on the oil prices. Mostly such events affect and limit production and drive the prices of oil up. Given the significance OPEC holds in the context of oil market, any such event can give rise to strong reactions and changes in oil prices. The member countries of OPEC also do not feel compelled to comply to maintain the production targets issued by the organization. They too can influence the oil prices by being willing or unwilling to maintain the target levels.

Sometimes unexpected disruptions too affect the level of production.  Such disruptions affect oil prices by the uncertainty they create. In conditions if unexpected outages, it remains uncertain that how soon the output will be restored. This can give rise to fears and speculations and in turn affect the oil prices. However, it is not only the current supply and demand that gets to influence the oil prices. To a large extent the prices also depend on projected production level and future demand. Estimating the future demand and supply gets to be a difficult task in the situations of uncertainty and amid rapid changes. Market conditions can sometimes also cause a delay in the adjustment of production quotas and the impact is felt on prices. In this way, you can see that OPEC is a major force in the international oil market that can influence or rather control prices through its price quotas and other mechanisms. The world knows how important a consistent oil supply is to run its machines and factories. OPEC is a significant power whose writ runs large in the global oil market.  It has already made the world feel its power. The oil embargo against America and other allies of Israel in 1973 was a demonstration of the cartel’s power.