OPEC to reduce oil production

http://www.economist.com/news/finance-and-economics/21711088-oil-prices-surge-saudi-arabia-and-iran-sign-deal-opecs-meeting

This article is about OPEC members, acting as a cartel, under Saudi Arabia’s coercion, try to reach a deal on cutting on production.

The organization pledged to remove 1.2 millions barrels of oil a day from global oil production if non-OPEC countries, like Russia, increase their production.

This action will eventually lead to a rise in the oil price to above $50, even above $60 within weeks, per barrel due to a great decrease in the supply of oil, as much as 2% of global production. It may mark the beginning of the end of a two-year glut in the world’s oil market.

Since September, Saudi Arabia’s oil minister and his Iranian counterpart have been engagingĀ in a game of brinkmanship that, if failed, would push the price of oil below $40 a barrel. However, Saudi Arabia was wise enough to realize that pragmatism is the best choice, so it chose to cut down 4.6% of its oil production, and so did other OPEC members.

The cut will take effect on January 1st, and it will greatly reduce the global oil inventories next year. Non-OPEC output has fallen this year, adding more impetus to the cartel’s efforts. If oil production decreases and oil price increases, America shale producers will have the incentive to produce more output, but their ability to produce low-cost oil has been exaggerated, so this may not happen as very swiftly and easily as it is said. Nonetheless, many shale producers have been standing still, despite OPEC’s many efforts to kill them. The cartel, after all, haven’t been able to declare even a Pyrrhic victory from the past two years.

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