How does OPEC control the price of oil? | How do Cartels manipulate the price of oil?

Dear friends, You must have noticed that in the last few days people are again worried about the oil prices on the news channel. The price of crude oil was stabilizing in the range of $80-$85 per barrel, but 2 weeks ago something happened the crude oil prices immediately touched a high of $93 per barrel; and so far, crude oil prices are above the $85 per barrel mark, and this happened because of a deliberate decision made in Vienna by some oil producers. Yes, We are talking about OPEC and their allies, also known as "Cartels of Oil Producing Countries". These countries, jointly OPEC+, decided on 5 October to cut oil production by 2 million barrels per day. And as soon as this news came, there was a stir in the whole world and the prices of crude oil started increasing. OPEC says that this step has been taken in response to rising interest rates in the West and a weak global economy. But some experts say that the purpose of OPEC+'s move is to artificially inflate oil prices. Now you are wondering what is OPEC and OPEC+. How is it so powerful that it's one move has affected the global economy? And how are they able to manipulate oil prices? Let's discuss it in this article. All right let's get started.

How does OPEC control the price of oil?
Source by Google

How are crude oil prices determined?

Have you ever wondered how oil and its prices move around the world? Like every commodity, the answer must be supply and demand, right? And this is true to some extent; That's why, if you go back two and a half years from today, then due to Covid-19, lockdowns were going on all over the world. The demand for crude oil was very low as industries and economic activities, and due to that, the price of oil in the futures market had gone negative. After the Russia-Ukraine war, as US and European countries imposed sanctions on Russian oil, crude oil prices crossed $130 a barrel due to limited supplies. And, due to the fear of global recession, rising interest rates, and strict lockdown in China for a few months, it seemed that the demand for crude oil could again decline and due to this, the fall in oil prices had come in the range of $ 80-85 per barrel. But there is a special feature of crude oil that makes its market much more dictated than the supply side. If the price of any product or service is high or low, then its demand is also affected. For example, if the prices of electronic goods rise, their sales will decline. But even if there is a big difference in the prices of oil, even then there has not been a significant difference in its demand. Because the world runs on oil – gasoline, and diesel are used for transportation and energy requirements and crude oil is a primary raw material and energy source in many industries. Therefore, due to the rise or fall of oil prices, almost all industries are affected. Technically, the oil demand is inelastic, that is, whether the oil prices go up or down, its demand remains relatively unchanged. So now if the demand is constant, then the oil suppliers here have the power to decide the prices. Meaning if you want to increase the price of oil, then just make the production work! The demand is going to remain almost the same, so the prices will automatically go up. Now you must have understood that the price of oil is not dependent on the demand but on the supply of oil. Now, you need to understand one term very well:

Spare Production Capacity

Spare production capacity is the amount of "excess" production that a country or oil producer can achieve within 30 days and requires us to continue for at least 90 days for excess capacity. In easy language, through the additional production capacity of an oil producer, we can get an idea of ​​how much they can increase their production quantity as needed. And the oil-producing countries which have more surplus production capacity, dictate and manage the crude oil market. We just understood how the oil market is completely dependent on supplies. 

Do you know which country has the largest surplus capacity? And do you know which country is the world's largest oil exporter? 

The answer to both is the same - Saudi Arabia! 

Historically, Saudi Arabia has had a 1.5 to 2 million barrels per day capacity. That is, Saudi Arabia has the power to increase its capacity to keep crude oil prices under control to meet the additional demand in times of need. And being the world's largest oil exporter, oil prices move with changes in oil production by Saudi Arabia. But is Saudi Arabia the only one to dominate the world oil market? The answer is "No". Here comes OPEC ie the Organization of Petroleum Exporting Countries.


The Cartel that Controls World’s Oil: OPEC+

The Organization of the Petroleum Exporting Countries (OPEC) is a group of 13 countries that was started in 1960. But why OPEC started is very interesting. Despite producing a commodity as valuable as oil, it was unable to make profits in oil-producing countries. That is, the oil market was previously dominated by a few multinational oil companies known as the "Seven Sisters". These mainly included companies from Western countries, including companies from America and Britain. But in 1960 some major oil-producing countries decided to stand against these companies. And Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela started OPEC. OPEC was launched to stabilize the price of oil around the world, provide a regular and economic supply of petroleum to consumers, and ensure stable incomes for oil producers. OPEC, which started with 5 countries in 1960, is seen today as a strong group of 13 countries, including countries like Algeria, Libya, and the United Arab Emirates. In addition, in 2016 OPEC formed an even stronger alliance with the top 10 non-OPEC oil exporting countries in the world known as OPEC+. Interestingly, Russia is also included in OPEC+ with countries like Azerbaijan, Bahrain, Malaysia, Mexico, Oman, etc. Due to the presence of so many top oil exporting countries in OPEC+, they can influence the world oil market today. If I tell you some numbers, you will be shocked. OPEC+ controls 50% of the world's oil supply and 90% of proven oil reserves. That is, this cartel named OPEC+ enjoys supply-side dominance in the global oil market. And we just had an agreement on how to control prices by varying the supply in the oil market. And OPEC+ has done just as well by announcing a reduction in its oil production by 2 million barrels per day. 2 million barrels per day accounts for 2% of the world's total supply, which sounds like a small number but its impact can be very high.


Why did OPEC+ decide to cut production by 2 million barrels per day?

As I mentioned earlier, all the central bank's interest rates have gone up due to high inflation all over the world and despite rate hikes, major western countries such as the US and UK have not been able to control high inflation, which Indicates a further increase in interest rates. Big economies today, especially the US, are standing on the edge of recession. Because of these fears, oil prices were trading in the range of $80-85 per barrel for a long time. And if the world's largest economy - the USA - goes into recession, the oil demand will fall sharply. And in such a situation, oil prices will go higher, due to which the income of oil exporting countries will have a great impact. But due to the reduction in oil production, oil prices have increased, which is proven to mean that inflation will increase further. Because the cost of transportation and energy will increase even more. Western countries are not at all happy with the OPEC+ announcement.


Why are other countries not able to counter OPEC+?

Do you know which is the largest oil-producing country in the world? You are wondering, Any OPEC+ country like as; Saudi Arabia or Russia! But it is wrong. The right answer is the: USA. Similarly, China also produces a significant amount of oil. And not only the US and China but there are other oil-producing countries. Then why is this country not countering the reduction in the production of OPEC+? Because you will be able to sell oil in the market only when it is more than your demand. Interestingly, the USA is the largest producer of oil and also consumes the most oil. And the thing to note is that its consumption is much more than the production of the USA which means The USA has to import oil from outside to meet its additional demand. Something similar is the case with China. And this reason has to be done that it becomes very difficult for the rest of the countries to counter the impact of OPEC+. 


What’s India doing?

Well, this is what happened around the world! But is India taking some steps in this direction? Because this situation can become a cause of concern for India. India imports 85% of its energy requirements, and rising oil prices mean rising import bills, a depreciating rupee, and rising inflation. Now, India's diminishing forex reserves have already become a challenge for us.  India has already started reducing its dependence on OPEC countries. The share of OPEC countries in India's oil imports is decreasing. India has increased its oil imports from Russia in the last few months because we were getting Russian oil at a discount. In addition, Indian companies have also signed new oil supply deals with South American countries like Colombia and Brazil.

Post a Comment

0 Comments