OPEC Deals and Oil Prices

At the intersection of political policy and economics lies the crude oil market. As economics students we are aware that alterations in either the supply or demand curve shifts the equilibrium quantity or price. As outlined by the Wall Street Journal, a deal between a Saudi royal and rival Iran sparked an upward surge in U.S crude oil prices as barrels traded for over $50 for the first time since late June. The agreement slashed 1% to 2% of  the 33.2 million barrels a day production from OPEC’s 14-nation cartel. This the first time in eight years that OPEC has agreed to limit output on crude oil. The limit in supply shifts the supply curve upward as seller require a higher price for crude oil at the same quantity. With some exceptions, the demand curve remains unchanged as we observe the large price surge.

The crude oil market is greatly impacted by the political stance of OPEC as seen in the graphic below. Due to the fact that OPEC controls a large percentage of the overseas crude oil supply, and alteration in the exportation of crude oil has a great impact on price.

OJ-AQ046_SAUDIO_16U_20161006123322

Source: http://www.wsj.com/articles/how-a-saudi-royal-sparked-an-opec-deal-and-sent-oil-prices-past-50-1475763151

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