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OPEC and Oil Prices

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Last week, OPEC, the Organisation for Petroleum Exporting Countries, held its formal conference in Vienna, Austria. Although commonly named a cartel, the organisation represents 12 countries, not including Russia and the US. They hold significant power, supplying around 40% of the world’s oil.

With the price of oil in freefall recently, there was much anticipation on what OPEC would do. Cutting production output would take supply out of the global system and increase prices. However, this would mean OPEC would lose market share to the US, which has seen a significant rise in oil production. As a result, there is now a global glut of oil, which poses a significant threat to OPEC. Following from this, OPEC has decided to maintain production at 30 million barrels a day. This means that the price of oil will continue to fall. Today it has gone below $70 a barrel.

Why did OPEC keep production? It can be argued that it wants to remove the threat of US shale production. For decades, oil producers have enjoyed high oil prices and built significant cash reserves to help weather the storm. US oil, on the other hand, is new and will become unprofitable if oil falls below a certain price. Therefore, a survival of the fittest scenario unfolds.

Market share is the rhetoric being used by all the oil ministers. Iranian oil minister Bijan Namdar Zanganeh stated that, “If you want to increase your share, you have to reduce prices”. Iran still has economic sanctions imposed on it, and once they are lifted, they will boost oil output despite low prices. “We’ll still do it. What’s important for me is our share,” said the oil minister.

What does that all mean for the average consumer? Low oil prices mean that petrol prices should go lower as well. For years, we have had to put up with unjustified high oil prices. The correction will hopefully help costs reduce.


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