What Is OPEC and How Does It Influence Oil Prices?
From the gasoline you fill your car with to the plastics that make up our everyday lives, oil—the world’s second most important commodity—has a major impact on much of the global economy. That is why the Organization of the Petroleum Exporting Countries, or OPEC, is so influential worldwide. The organization is the world’s most powerful oil-producing and exporting partnership, influencing the global oil market with their decisions.
What Is OPEC?
Since its inception in 1960, OPEC has become the most powerful authority in the global oil market. Founded in Baghdad by 11 founding members, including Iraq, Iran, Kuwait, Saudi Arabia, and Venezuela, the organization sets policies in the hopes of influencing the oil market to maintain a consistent flow of revenue and attractive pricing.
With the original founding countries added to the ranks over time, OPEC now has 14 members. These countries, which together produce approximately one-third of the world’s oil, play a major role in bringing together the pricing and production of crude oil and natural gas.
How Does OPEC Influence Oil Prices?
The OPEC cartel’s decisions can have major impacts on the global oil market. When OPEC sets production quotas, it increases oil prices since production becomes limited due to limited supply. On the contrary, OPEC’s decision to increase production can throw the oil market into disarray, as the glut of oil leads to a sharp drop in prices.
OPEC also influences oil prices indirectly. When oil prices fall, these countries must adjust their budgets to sustain the high cost of government running and projects. Thus, the countries respond to these situations by raising taxes and cutting public spending, which in turn reduces growth, resulting in rising oil prices.
In The Big Picture
OPEC’s sway over global oil production and pricing has lasting implications for a variety of industries. OPEC’s decisions affect investment decisions, development and macroeconomic levels, positively or negatively impacting economies across the globe.
While OPEC’s influence over global markets is clear, what remains to be seen is how countries around the world respond to the oil cartel’s actions. How countries interpret OPEC’s signals, optimize their oil-dependent industries, and become resilient to price shocks will define the future of the energy industry and its stability worldwide.