OPEC’s Influence on Global Oil Prices
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 more than 50% of global oil supplies and about 90% of proven 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 does OPEC+ as a whole.
Key Takeaways
- The Organization of the Petroleum Exporting Countries Plus (OPEC+) is a loosely affiliated entity consisting of the 13 OPEC members and 10 of the world’s major non-OPEC oil-exporting nations.
- OPEC+ aims to regulate the supply of oil to set the price on the world market.
- OPEC+ came into existence, in part, to counteract other nations’ capacity to produce oil, which could limit OPEC’s ability to control supply and price.
- In March 2020, OPEC+ initially failed to reach an agreement about cutting production to stabilize the price of oil as it plummeted during the pandemic.
- OPEC+ announced production cuts in October 2022 aimed at bolstering oil prices as they slid on recession concerns.
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 in order 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 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. But that is not how market dynamics works. 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 adjusts.
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 who both have the ability to increase production, are big proponents of increasing supply as that would increase their revenue. However, other nations who 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 U.S. and Canada.
While oil market developments have repercussions throughout the economy, changes in oil prices have a particular impact on inflation. However, oil’s capacity to drive inflation in the U.S. declined over recent decades as the economy became less oil-dependent. Oil prices tend to have a greater effect on the Producer Price Index (PPI), which measures prices at the wholesale level, versus the Consumer Price Index (CPI), which measures the prices consumers pay.
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 at a time when global oil demand was slumping as the world was dealing with the 2020 global 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.
In the spring of 2020, oil prices collapsed amid the economic slowdown. OPEC and its allies agreed to historic production cuts to stabilize prices, but they still dropped to nearly 20-year lows.
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. 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 under $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 the second-largest exporter in OPEC+ engaged in a violent conflict with its neighbor and enflamed 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.”
It remains to be seen how effective the OPEC+ production cuts will be in slowing or reversing oil price declines. Continued concerns about a global recession could overshadow the potential for a tighter supply implied by the coalition’s production cutbacks. However, the recent turmoil in the oil markets is a great example of the mechanisms OPEC+ uses to influence prices and their far-reaching impact on the global economy.
Which Countries Are Part of OPEC+?
The Organization of the Petroleum Exporting Countries (OPEC) has 13 members: Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela. In 2016, OPEC formed the alliance known as OPEC+ with 10 other top oil-producing nations: Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan.
How Does OPEC+ Control Oil Prices?
OPEC+ regulates the supply of oil in order to influence the price of the commodity on the world market. The group can achieve this by coordinating supply cuts when the price is deemed too low and supply increases when its members believe prices are too high.
How Do Oil Prices Affect the U.S. Economy?
Oil prices have a multifaceted impact because of the diversity of industries operating within the U.S. economy. Higher oil prices can help create jobs and drive investments as it begins to make economic sense for companies to develop high-cost shale oil projects. However, elevated oil prices affect consumers and businesses by increasing transportation and manufacturing costs. Lower oil prices have the opposite impact—limiting unconventional oil activity but benefiting other sectors that are sensitive to fuel costs.
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 as well as increased production from countries outside the group may limit the capacity of OPEC+ to control prices over the long term.
