Feb 10, 2017

How OPEC wants to raise oil prices

THE ISSUE

Global oil prices hit record lows last year, and oil-dependent countries have been suffering from reduced prices and falling demand. As a result, OPEC — the group of 13 oil-producing countries who work to control prices — decided to step in.

THE FACTS

In November, OPEC agreed — for the first time since 2008 — to cut overall production by 1.8 million barrels a day, divvied among its members. Non-OPEC countries, like Russia, have also joined in on the cuts. The aim is to restrict production enough so that demand rises, and prices rise with it.

The biggest problem worrying industry experts is that the agreement isn't enforceable, and many countries have an incentive to cheat the other OPEC members, which they've done before. They do this by producing a little more oil than they said they would to take advantage of the higher prices.

The deal went into effect on Jan. 1, and OPEC members have stuck to their word, so far. According to the International Energy Agency, Saudia Arabia cut production by even more than it committed to in the first month alone, and higher demand has helped boost the group's vow to rebalance world markets. In the U.S., oil producers are taking advantage of the higher prices by ramping up drilling activity and increasing daily output to the highest levels since April.

WHY THIS MATTERS

If all members of OPEC pull through and continue to cut production by the amount they say they will, they'll eliminate much of the glut in the oil market that's bogged down the industry for over two years. If not, the deal could be the beginning of the end for OPEC.

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