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.

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.

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.

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.

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.