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World Problem

OPEC has significant short-term influence over oil prices by controlling supply, but individual member countries have different incentives that limit OPEC's long-term price influence. While OPEC can announce supply cuts or increases, market forces ultimately determine the price equilibrium, though announcements can temporarily affect prices by altering expectations.

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Michael Dula
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52 views1 page

World Problem

OPEC has significant short-term influence over oil prices by controlling supply, but individual member countries have different incentives that limit OPEC's long-term price influence. While OPEC can announce supply cuts or increases, market forces ultimately determine the price equilibrium, though announcements can temporarily affect prices by altering expectations.

Uploaded by

Michael Dula
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd

In 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.

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