Who really influences the price of oil? - BBC news

Quote from President Trump

Opec, the Organization of Petroleum Exporting Countries, has certainly had its share of criticism for many years.

President Trump recently accused the group of "tearing the rest of the world" and keeping "artificially high" oil prices.

He was sometimes accused of holding the world hostage – particularly in the mid-1970s, when he cut off supplies and the price tripled.

But how do Opec energy ministers meet in Vienna, does the group exercise much more influence?

Production control

They have been reached by some non-member oil-producing countries, in particular Russia.

The group wants to stabilize or increase the prices of crude oil, which suffered a sharp decline at the beginning of October.

The main tool is to manage its production levels, cutting if it wants prices to increase or increase supplies if they want to fall, at least up to a point that would not cause the collapse of prices.

The presence of Opec in the market is certainly big enough to make an impact.

It represents over 40% of global crude oil production.

It was higher – more than half in the first years & 70s – but the current figure is still a considerable share.

But the other 60% of the sector is also important.

Two non-OPEC countries are particularly important in several ways: Russia and the United States.

Influence of Russia

Russia has contributed to Opec's current commitment to move prices higher.

It started in 2016 with an OPEC decision "to implement a production adjustment", which means a cut of 1.2 million barrels per day.

Basically, Russia and a number of other non-OPEC members joined in their efforts to curb production.

Later, prices gained with the main international price, Brent Crude, reaching $ 86 (£ 67) a barrel in early October – was less than $ 50 a barrel in the period prior to that decision.

This does not mean that the decision of Opec and the partners was the only factor.

The political turbulence in the OPEC countries Venezuela, Libya and Nigeria made it impossible for them to produce the amount of oil they could in theory.

Iranian sanctions

Iran has been hit by the reimposition of US sanctions on its nuclear program.

The possibility that Iranian oil may not be available for the global market – or that there would be less – was an important factor that pushed prices to increase this year.

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AFP

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Iran continues to sell oil in some countries

But some major Iranian customers – China, India and Japan – have received temporary exemptions and can continue to buy Iranian oil for now without being affected by US action.

As a result, prices have actually lowered because there was less demand for oil from other producers than was expected.

Having said that, the price increase since the end of 2016 has had to do something about the agreement between Opec, Russia and others.

Within Opec, Saudi Arabia has been the key.

According to estimates by the International Energy Agency, Saudi Arabia accounts for over a third of Opec's total production capacity and over half of the unused capacity of the group.

This is an indicator of the extent to which production is braked.

As important as Saudi Arabia is, it was reluctant to act alone on prices.

He then expected, as in general, other OPEC members to make some sacrifices, but he also wanted Russia to be involved.

The biggest American producer

He is a third big player in global business; the United States, currently the largest producer of all.

The United States is a very different beast from the others.

Oil is produced by private industry that makes decisions based on what is profitable.

The big Russian oil companies are close to the government and the dominant company in Saudi Arabia – Saudi Arabia – is state-owned.

American oil producers do not cooperate with OPEC to manage prices, because this would be illegal under US anti-trust law or competition law.

But over the past decade something has happened in the United States or so that has transformed the global industry – the rise of shale oil.

There are two important aspects to this.

Impact of shale oil

The exploitation of a relatively new type of resources has reversed a long-term decline in US oil production.

The country still has to import oil. But now it can satisfy two-thirds of its needs, while just over a decade ago it was a third.

Furthermore, shale can respond more quickly to a changing market.

It does not need large-scale investments like conventional oil. The investor can recover his money much more quickly, so shale production can be increased more quickly when prices start to rise.

Shale was one of the reasons why oil prices plummeted sharply after mid-2014.

One of the possible reasons why Opec did not respond earlier than it was the desire of some members, particularly Saudi Arabia, was to see the American shale producers squeezed by lower prices.

Opec still matters, but is far from being fully responsible for the global oil market.

And in the longer term, if global efforts to tackle climate change mean that we become less dependent on oil – a big if possible – then Opec will be much less important.

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