OPEC Sends Oil Prices Soaring

http://www.nytimes.com/2016/11/30/business/international/opec-energy-oil-saudi-iran.html?ref=energy-environment

As a result of low oil prices world wide, members of the Organization of the Petroleum Exporting Countries agreed this fall to lower collective production. Acting as a cartel, the countries came to an agreement that if they restricted production across all its members, the prices paid for their oil would increase significantly. They agreed to cut production by 4.5% or 1.2 million barrels a day. The deal, however, is contingent on the cooperation of Russia, a country notorious for reneging on its promises and producing more oil than previously allowed. In order to take advantage of the high oil prices, countries often cheat and produce more than they had agreed to. This break in promise causes the world price of oil to decrease as the supply of oil is increased because of Russia. Buyers become more willing to buy from Russia’s supply than the other countries who continue to sell oil at the negotiated higher prices. In the short term, Russia’s profits will be much higher than those countries who hold fast to the deal. It is common for more countries to break these deals, however, and sell more oil at a lower prices once they see other countries cheat and break the promise. Iran, for instance, has in the past gone on its own selling spree in India which makes this new plan less meaningful. Eventually, with countries breaking their promises, world prices drop back down to where it they were originally and each country’s oil revenues are much lower than what they could have been had no one broken the deal.

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