Oil is a hugely important commodity which powers the industrial world – from providing reliable energy to power homes, businesses and transport, to forming a range of materials (including plastics) that are used the world over.
It may also not be a surprise to learn that 2 of the most important variables in determining the price of oil are supply and demand. Demand has a part to play in the longer term, with increasing oil consumption in developing markets balancing out the effects of diversification away from oil in developed markets. Suppy has a larger part to play particularly in the shorter term. It follows that when the global supply of oil is cut, the price of oil should inevitably rise.
The Organisation of Petroleum Exporting Countries (OPEC for short), is an organisation made up of 12 of the world’s major oil exporting countries, set up in 1960 to coordinate oil policy amongst its members to influence oil price, and also as a counterbalance to the US in the oil production market. Current members include, Algeria, Angola, Ecuador, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. OPEC accounted for
Recently OPEC agreed to cut oil production to try and strengthen the price of oil above the recent low seen in 2016. With a material reduction to oil production and supply, are oil price rises inevitable?
Not all oil producing countries are members of OPEC
Out of the top 10 oil producing nations in the world, half are non-OPEC members, namely Russia, United States, China, Canada, and Brazil. So whilst OPEC does have the scale to influence the oil price (OPEC member countries produce 40% of the world’s crude oil), that power is not absolute.
Not all countries observe proposed oil production cuts in a timely fashion
Often members of OPEC may disagree on the direction that the group should take on oil production. This is especially amplified when disagreements are between the larger oil producers and political rivals Saudi Arabia and Iran. As has recently happened with recent OPEC proposed supply cuts, Iran, very resistant to supply quotas at this point in time have negotiated an exemption and have been taking full advantage by increasing oil supply to take advantage of slightly higher oil prices.
Further, members of OPEC that have greater foreign ownership of oil production facilities (for example in the case of Iraq) may find it difficult to enforce OPEC imposed production guidance as foreign companies primarily look to maximise economic return above all else.
US shale exports
Politics also plays a part in the oil market given the importance of the commodity to the global economy. This is especially the case in the net oil importing US, where security of energy supply is always a key topic for debate. New technological advancements has allowed the US to continue to increase its output of shale oil, depressing global oil prices. Improvements in the efficiency of the extraction process driven by these technological advancements has meant that these shale oil producers have been able to weather the low oil price and remain in business.