So how much influence does OPEC really have on prices

Intelligent Investor

Independent Financial Research

So how much influence does OPEC really have on prices? In my view, none. OPEC isn't a monopoly that can simply set the oil price. It's a coalition of 12 oil producers who, together, control about 40% of global production. For OPEC to exert influence, all members must limit their own output. That is possible in theory but, in practice, unlikely. Let's assume OPEC comes to an agreement to raise prices. That means each member agrees to a production quota to limit output below optimum levels. There are two problems with this: no one can verify whether individual countries are sticking to their quota and no individual member, by themselves, can influence prices. Each member knows it can quietly produce more oil than its quota without getting caught or influencing prices. The incentive to cheat the cartel is overwhelming. Throughout it's history, OPEC has rarely been effective. OPEC often makes grand statements about controlling prices or influencing the oil market. Don't be fooled. The organisation is largely powerless and, as a force in markets, it is meaningless. (VIEW LINK)

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Intelligent Investor
Independent Financial Research

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