How does OPEC Control crude oil prices?

Summary

  • OPEC is an inter-government organisation that was founded in 1960 with eleven founding members.
  • The primary objective of the group is to stabilise the crude oil market by maintaining demand and supply.
  • OPEC controlled the 2020 oil crisis by introducing significant production cuts and clearing the market glut.

OPEC stands for the Organization of the Petroleum Exporting Countries, and it was founded in 1960. It is an inter-government organisation that was initially created by five founding member countries and later increased to 11 countries. At present, there are 13 member countries in the organisation.

The OPEC member countries hold 79.4% of the world's total proven oil reserves, with nearly 64.5% coming from the Middle East alone, as per the 2018 estimates.

OPEC’s Objective and Goals

The main objective of the cartel is to keep the oil prices at a profitable level for its member countries and keep the oil market stable. The group also ensures that the member countries make uninterrupted supply and get a steady income.

In addition to this, the cartel is also responsible for keeping the oil prices stable and adjust the global oil supply. In case if the oil price increases, the group increases its gross production and when the prices decrease to a lower level, OPEC curbs the production and supply to increase the prices. An increase in oil prices provides an opportunity for the oil companies to extract the expensive oil too.

Also Read: How is crude oil extracted?

What does OPEC do?

OPEC members meet two times a year at its headquarters in Vienna, Austria, usually once in late fall and again in late spring. In the meetings, oil ministers agree on production quotas for each member country. However, the talks start several weeks or months before the official meeting.

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Most of the cartel’s production comes from the state-run oil giant companies making it convenient for an official of the cartel to control oil prices, unlike in the US, where private companies are dominant and make independent production decisions.

Must Read: Why are crude oil prices on fire in 2021?

How does OPEC control oil prices?

The price of any commodity depends on the game of supply and demand. OPEC members and its allies are collectively known as OPEC+, deciding on how much oil to produce. The amount of agreed oil directly impacts the ready supply of crude oil into the international market at a given point in time.

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OPEC+ exerts considerable influence on the oil market price and tries to keep it at a decent level to maximise the profits of its member and allied countries.

If OPEC+ countries don't agree with the oil prices, it is in their interest to significantly cut the production to increase the prices. However, no country intends to reduce the supply because of the revenue. The countries want the prices to remain high while they increase supply so that their revenue can also rise.

Also Read: Crude oil rises 44% YTD, stoking up inflationary pressure.

Russia and Saudi Arabia are the two largest crude oil exporters in the world that can increase production and are also big supporters of increasing production as they intend to increase their revenues. However, the countries that cannot increase their production either because they are operating on full throttle or else not allowed to do so oppose increasing the supply.

Since OPEC members have a huge crude oil supply market share, the group has the power to curb the supply to a level that can influence the crude oil prices, but there are certain drawbacks of this. Too high prices of crude oil can reduce the sales too by putting pressure on the demand. Also, high prices can allow non-OPEC countries to pump more oil from expensive sources. A spike in prices can also encourage oil consumers to switch to alternative sources of energy dodging fossil fuels.

What was OPEC's role in the 2020 oil crisis?

OPEC and its allies played a very important role in stabilising the oil prices after the chaos created by the impacts of the COVID-19 pandemic. The group was focused on bringing the oil prices from the negative levels to a decent pre-pandemic level.

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However, before sanity in crude oil price prevailed, the crude oil market was in deep trouble. The global economy froze in March 2020, when Russia and Saudi Arabia rejected the proposal to curb production. As a result of this overproduction and limited demand, the market was flooded with excess oil creating a glut. As a result, crude oil prices crashed by nearly 30%.

In April 2020, the WTI crude oil prices hit the negative level for the first time in the history of the entire oil and gas industry. In the same month, OPEC+ agreed to a production cut of 9.7Mbpd through June. During May, the oil glut was so intense that there was no storage space available to store crude oil.

Interesting Read: What are the factors that influence global crude oil prices?

During June-July 2020, the prices reached near US$40 per barrel on the back of significant production cuts. In July, OPEC+ agreed to roll back production cuts through 2020 to 7.7Mbpd. Then, in November 2020, oil jumped on Pfizer's vaccine rollout. On the very next month, OPEC+ approved an incremental increase of 500,000bpd.

In January 2021, Saudi Arabia unilaterally decided to cut its production by 1Mbpd. In February, prices hit the pre-pandemic level for the first time in almost a year. During March-April, crude oil traded between US$60-US$70 per barrel. The price hit US$75 per barrel in June 2021 for the first time after the pandemic.


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