Why is opec so powerful

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After skyrocketing with the outbreak of the Iran-Iraq war, prices eroded gradually due to a combination of a global oil glut as oil exploration in non-OPEC countries increased, falling demand due to decreased economic activity in industrialized nations and energy conservation in response to astronomical gas prices. As oil prices began to fall, OPEC kept oil production low in an attempt to keep prices up.

In , in an attempt to regain their lost market share, OPEC introduced oil price cuts for the first time to bring prices for Saudi Light crude in line with the global market price. This was when OPEC really began to look like a price setting cartel.

Saudi Arabia was the only exception as they decided to be the swing producer, varying output to match market conditions. The production quotas proved hard to enforce, as many OPEC members were unhappy with their quotas and cheated or decided to completely ignore the production quotas agreed upon.

By , Saudi Arabia was fed up with their role as swing producer while other OPEC members continued to cheat on their production quotas. Oil prices plunged to as low as USD 7 per barrel in At this point the group finally abandoned its production quotas and price setting scheme. A new production quota system was developed after studies were done on how to create a formula for setting quotas equitable for all OPEC members.

A Reference Basket for pricing was also set. The new production quota system seemed to succeed where the previous one had failed. Prices began to creep up during the rest of the decade to around USD 20 per barrel. In , the Asian Financial Crisis, also known as the Asian Contagion, hit South-East Asian countries hard as a series of currency devaluations, starting in Thailand, snowballed into a full-blown crisis spreading into many other countries in in the region.

This caused declines in stock markets, reduced import revenues and stirred government turmoil. They did not take into account the Asian Financial Crisis, which resulted in lower demand for oil.

As a result oil prices plummeted to the single digits, with Brent Crude Oil prices falling below USD 10 per barrel toward the end of and into OPEC then decided to cut oil production two times in , however, the cuts failed to halt the slide in prices. A third round of cuts was needed in , this time in collaboration with Norway and Mexico, to stabilize prices.

If the prices for a reference basket of crude oil fell below the lower-end of the range, OPEC would automatically increase production and if it passed the higher-end they would automatically decrease production. This seemed like a fairly prudent system to implement, but the price band mechanism was unceremoniously and quietly done away with in Since then OPEC is more tight-lipped on specifying prices.

From onwards, rising demand from Asia, especially China, led oil prices on a rapid upward trajectory breaking the USD per barrel barrier in and finally topping out at almost USD in July of the same year.

After prices passed USD per barrel, Saudi Arabia called an emergency OPEC meeting to discuss the skyrocketing prices as it was concerned that the high prices could derail the world economy and bring demand crashing down with it.

Saudi Arabia basically agreed to pump as much oil as consumers were demanding. Ironically, the beginning of the Global Financial Crisis hit oil markets not too long later in and the price of oil plummeted down toward the USD 30 price level.

In response OPEC announced a record output cut. In discontent began to surface among the OPEC members. Prices held at high levels through to mid when new supply coming from U.