Many of the largest oil-producing countries in the world are part of a cartel known as the Organization 🐎of the Petroleum ♑Exporting Countries (OPEC). In 2016, OPEC allied with other top non-OPEC oil-exporting nations to form an even more powerful entity named OPEC+, or “OPEC Plus.”

The cartel’s goal is to exert control over the price of the precious fossil fuel known as crude oil. OPEC controls about 40% of global oil supplies and more than 80% of proven 澳洲幸运5官方开奖结果体彩网:oil reserves.

This dominant position ensures that the coalition has a significant influence on the price of oil, at least in the short term. Over the long term, its ability to influence the price of oil is diluted, primarily because individual nations have different incentives than OPEC+ as a whole.

Oil Price and Supply

As a cartel, the OPEC+ member countries collectively agree on how much oil to produce, which directly affects the ready supply of crude oil in the global market at any given time. OPEC+ subsequently exerts considerable influence over the global market price of oil and, understandably, tends to keep it relatively high to maximize profitability.

If OPEC+ countries are unsatisfied with the price of oil, it is in their interest to cut the supply of oil so that prices rise. However, no individual country actually wants to reduce supply, as this would mean reduced revenue. Ideally, they want the price of oil to rise while they increase supply so that revenue also rises.

However, that is not how 澳洲幸运5官方开奖结果体彩网:market dynamics work. A pledge by OPEC+ to cut supply causes an immediate spike in the price of oil. Over time, the price reverts back to a level, usually lower, when supply is not meaningfully cut or demand adj✱usts.

Conversely, OPEC+ can decide to boost supply. For instance, on June 22, 2018, the cartel met in Vienna and announced that it would be increasing supply. A big reason for this was to offset the extremely low output by fellow OPEC+ member Venezuela.

Saudi Arabia and Russia, two of the largest oil exporters in the world that both have the ability to increase production, are big proponents of increasing supply, as that would increase their revenue. However, other nations that cannot ramp up production, either because they are operating at full capacity or are otherwise not allowed to, would be opposed to this.

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. A case in point where the expectations of OPEC+ would be altered is when its share of world oil production declines, with new production coming from outside nations such as the United States and Canada.

OPEC+ Disagreed on Pandemic Production Move

In March 2020, Saudi Arabia, an original member of OPEC, the largest exporter of OPEC, and an extremely influential force in the global oil market, and Russia, the second-leading exporter and, arguably, the second most important player in the recently formed OPEC+, failed to reach an agreement about cutting production to stabilize the price of oil.

Saudi Arabia retaliated by ramping up production sharply. This sudden increase in supply happened when global oil demand was slumping as the world was dealing with the 2020 global COVID-19 health crisis. As a result, the market, which is the final arbiter of the price, overrode OPEC+’s desire to stabilize the price of oil at a higher level than the laws of supply and demand dictated.

Aside from reaffirming that market forces are more powerful than any cartel, especially in free markets, this episode also gave credence to the premise that individual nations’ agendas will override the cartel’s. Brent crude oil in April 2020 sunk below $20 per barrel, a level not seen since 2001. 澳洲幸运5官方开奖结果体彩网:West Texas Intermediate (WTI) crude oil, meanwhile, slumped to about $17 per barrel, a level not seen since 2002.

OPEC+ Cuts Production on Recession Concerns

As pandemic restrictions eased around the world, oil prices began to recover along with demand. From lows of less than $17 per barrel in the spring of 2020, WTI prices recovered to more than $80 by October 2021. When Russia invaded Ukraine in February 2022, oil prices climbed even higher, with WTI prices jumping over $115 per barrel by June.

As Russia, the second-largest exporter in OPEC+, engaged in a violent conflict with its neighbor, Ukraine, and inflamed tensions with the U.S. and Europe, the market showed its concerns about the stability of oil supplies.

Although the war raged on, with little to indicate a possible easing of geopolitical tensions, oil prices began to moderate in the second half of 2022. WTI slipped back down toward $100 per barrel by July.

As fears of a global recession raised questions about demand for oil around the world, OPEC+ sprang into action, announcing that it would cut production by 2 million barrels per day in an attempt to stabilize the recently sliding prices. The OPEC+ move came despite opposition from the U.S., with President Biden calling the production cuts “shortsighted.”

Since those cuts in 2022, OPEC+ has continued to make cuts into 2024 and will continue to do so into 2025. The group is cutting production in order to strengthen the market amidst weak demand, high interest rates, and to rival the increased production from the U.S. Brent crude has been trading below $80 (and WTI below $70), which is below what many OPEC+ members require to ensure balanced budgets.

The Bottom Line

The Organization of the Petroleum Exporting Countries (OPEC) and the broader coalition known as OPEC+ leverage their countries’ dominant market position to exert a strong influence over global oil prices. However, divergent long-term goals for member countries and increased production from countries outside the group may limit the capacity of OPEC+ to control prices over the long term.