The Organization of Petroleum Exporting Countries (OPEC) gathered in Algeria during the last week of September to discuss strategies to combat falling oil prices. Oil dropped below $30 per barrel earlier this year for the first time in more than a decade, and has remained stuck between $40 and $50 per barrel for the last several months. In light of this, OPEC left the conference announcing an initiative to cut their collective production in an effort to stabilize costs and benefit its member nations.
Traditionally, OPEC has been responsible for controlling the oil market by virtue of its vast supply of natural oil wells. The organization was started by five countries in the 1960’s, and now consists of twelve member nations from the Middle East, North Africa, and South America. The goal of the organization is for all members to coordinate production in order to maintain a steady global supply that sets the commodity’s price at each nation’s profit-maximizing level. Although OPEC has enjoyed great success in the past (most famously during the 1973 Arab embargo of the United States), the organization has struggled to collude in recent years due to a failure to coordinate with Russia (one of the world’s largest producers of petroleum) and an increase in the United States’ domestic supply thanks to new drilling techniques. The last time the organization successfully slashed its production to raise prices was in 2008, when the financial crisis hampered international demand and sent the price of oil below $40 per barrel.
Oil prices surged in the two weeks following the announcement, but have slowly decreased over the last week because of perceived difficulties with OPEC’s proposal. After reaching a three-month-high price of $51.60 on October 19, the price has fallen back below $50 per barrel in the last week. Analysts’ main concerns over the likelihood of the proposal come from Iraq’s announcement that it is seeking to continue increasing production regardless of the organization’s policy, and from Iran’s current hostility toward the organization’s largest producer, Saudi Arabia. Although OPEC announced Russian backing on its decision, the Russian government has contradicted itself over the last two weeks, casting doubt on whether they will actually work with OPEC to taper production.
One of the ironies behind this proposal is that a decision to cut global supply may actually help the U.S. drilling industry that has suffered from the low prices in 2016. According to the Wall Street Journal, domestic oil company struggles have damaged the US economic performance, so while an OPEC agreement may hurt consumers, it could unintentionally help some of the organization’s competitors from higher market prices.
OPEC plans on announcing the specifics of the production shortage on November 30, which will test if it still has the organizational discipline to affect the world’s oil markets.