What is OPEC CNBC Explains

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CNBC International

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Subtitles:
Oil isn’t just petrol for your car. It’s an ingredient in a lot of what we use, from the plastic glove that keeps your hand clean to the tires that keep you on the road. Which means the cost of these products can be affected by the fluctuating price of oil. That price is largely decided by supply and demand and the collective actions of an organization that provides 40% of the world’s oil - OPEC. OPEC stands for the Organization of the Petroleum Exporting Countries. It was formed in 1960 by founding members Iraq, Kuwait, Iran, Saudi Arabia and Venezuela. The group was created to monitor the stability and prices of the petroleum market, which was previously determined by U.S. dominated multinational oil companies. Currently OPEC member countries also include Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Libya, Nigeria, Qatar and the United Arab Emirates. Today these oil producing member countries supply over 40% of the world’s crude oil production. And together they control more than 80% of the world’s proven crude oil reserves. OPEC’s oil and energy ministers meet twice a year in Vienna, Austria where they collectively decide whether to raise or lower oil output in order to maintain a stable market. Critics argue that it’s a way for them to maintain the price they want. But does OPEC actually control world oil? The biggest consumers of oil are the U.S. and China. It was China’s rapid development in the early 2000s coupled with a lack of growth in the production of oil which sent the price of oil shooting up. In turn, those high prices made it profitable for non-OPEC countries like the U.S. and Canada to go after and discover harder to extract oil. Because they weren’t bound by the cartel’s decisions, these countries have grown their levels of supply, which meant OPEC’s market influence began to decline. A rise in supply and a reduced demand for oil in Europe and Asia led to the price of oil crashing. This caused political problems in some OPEC countries like Venezuela, where oil is the chief driver of the economy. It has the largest proven oil reserves in the world but also the highest inflation rate on the planet. But for most consumers, the drop in oil price meant cheaper fuel and lower energy costs. Since 2016 however, oil prices have been steadily rising. Later that year the Saudi-led OPEC members agreed to the first production cut since 2008, a reduction of around one million barrels a day. Crucially, Russia and 10 other non-members also agreed to pump less oil. OPEC and its allies agreed to extend the cuts through to the end of 2018. But in the U.S. there’s a shale oil boom. Production levels recently hit a record high and are predicted to surpass both Saudi Arabia and Russia. But even with higher output levels, the U.S. still imports roughly 300 million barrels of oil a month. For the renewable energy industry, however, keeping oil supply high and steady makes it an attractive alternative and might be one of the most powerful tools to grow the sector. But the price of oil remains volatile. Geopolitical factors such as the Iran nuclear deal and President Trump threatening OPEC could see the prices go up or down, but in the end the forces of supply and demand will ultimately determine the price. With more than 80% of the world’s proven oil reserves, OPEC in the 21st century continues to be relevant and their decisions can still affect the price of oil, if just temporarily. But as new sources of energy gradually replace hydrocarbons, the oil industry faces a race against time. In the words of an ex-Saudi oil minister: “The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.”

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