Q & A: Who decides the price of oil?

Major oil producing countries are struggling to reach an agreement on the future price of oil.

Photo by: AP
Photo by: AP

A woman kicks the shield of a National Guard soldier as other demonstrators push during a protest demanding food, in Caracas, Venezuela. The South American country which sits on world's largest proven oil reserves has been hit hard by lower oil price.

Updated Sep 28, 2016

What happens in the global oil market is not only important for multibillion dollar energy firms or commodity traders – but it also affects the lives of millions of ordinary people around the world. 

From daily travelling expenses to the prospects of getting a good-paying job in a firm, many events are related to the price of oil, which has dropped substantially in the last two years.

We seek to answer some of the questions surrounding this subject.

Iran hasn’t been able to make use of its oil resources like this offshore field – Sorouch – because of the international sanctions. Now it’s in a hurry to export. Source: Reuters

How is the price of oil set?

A group of 14 major oil producing nations known as the Organisation of Petroleum Exporting Countries (OPEC) decides how much end-consumers pay for fuel.

Other countries, such as Russia, one of the largest non-OPEC producers, also contributes to price determination.

These producers achieve this target by agreeing among themselves how much oil must be made available to buyers on the world market. It is generally believed that OPEC can move the prices up or down by imposing limits over the quantity of oil that its members can extract.

Who wants high oil prices anyway?

In the last two years, the price of oil has plunged from $100 a barrel to under $50 a barrel. 

Gulf Arab countries that also rely on oil revenues have been hit hard as well. In an unprecedented step, Saudi Arabia recently cut salaries and perks of government officials, a move seen as direct consequence of low energy prices.

The fallout of lower prices is also felt in North America, where dozens of energy firms have filed for bankruptcy and more than 150,000 workers have been laid off.

War-torn Iraq is among the countries which wants to put more its oil for sale on the international markets. Source: Reuters

Is OPEC doing anything about the price?

Yes. Just this week, representatives from the OPEC member countries met in Algiers to thrash out some kind of a deal. This was nothing new. OPEC members meet from time to time.

But this time round, officals urgency to come to a conclusion had raised hopes for a swift agreement which could stabilise the oil prices.

However, a disagreement between two of its key members, Iran and Saudi Arabia, has been a bottleneck standing in the way of any decision about how much oil should be available on the international market.

All eyes are now set on the next scheduled OPEC meeting in November.

Iranian Oil Minister Bijan Zanganeh dashed hopes of reaching any agreement with Saudi Arabia over the fate of low oil prices at the 15th International Energy Forum Ministerial (IEF15) in Algiers. Source: Reuters

Why can’t they just be nice and agree?

One major oil producer, Iran, wants to ramp up its production immediately. In 2012, a strict embargo was imposed on Iran's oil exports by the US and European Union. After that, it was only able to sell limited quantities of oil to a few countries.

But under the Joint Comprehensive Plan of Action – a deal reached last year with the US which lifts the sanctions – Iran can once again export and take part in the oil trade. Without those oil sales, Iran’s economy had suffered and it is in a hurry to cash in on its natural resources.

On the other hand, members aligned with Saudi Arabia, along with Russia, are pushing to cap the global supply by freezing production at this year's levels. Limiting the supply can drive down the price. 

The good news is Saudi Arabia has shown leniency in its stance over Iran. This has raised prospects for an agreement in the upcoming meeting. 

Is that all for the oil price?

No. OPEC has kind of shot itself in the foot. Before mid-2014, the oil price had gone up by a lot. It made it feasible for drilling companies in the United States to extract oil from shale formations – an otherwise expensive way of taking out oil. 

And so much of it had started to come out that it ultimately led to a glut in the market. Any resurgence in oil price will only encourage producers in the US to shore up their supply, creating same situation which haunts the market right now.