Crude oil holds a prominent position in the global commodities market because oil price changes impact the global economy. Crude oil prices are largely dependent on two factors:

  1. Geopolitical developments
  2. Economic events

These two variables can lead to changes in oil demand and supply levels, which drives oil price fluctuations from one day to the next. For instance, the 1973 Arab oil embargo, the 1980 Iran-Iraq war, the 1990 gulf war, the Asian financial crisis of 1997, and the global financial crisis of 2007-2008 are some of the historical geopolitical developments which have impacted oil prices significantly.

Key Takeaways

  • Oil prices are driven by many factors including supply and demand.
  • OPEC+, which is the amalgamation of OPEC and non-OPEC nations like Russia, Mexico and Kazakhstan, controls over 50 percent of global oil supplies and about 90 percent of proven reserves.
  • OPEC (especially Saudi Arabia) have the upper hand in determining the direction of oil prices, but Russia has become a key player as well.
  • Evidence is inconclusive whether non-OPEC countries are influential in determining crude oil prices.

Impact of OPEC and OPEC+ on Oil Prices

Countries involved in global oil production are either Organization of Petroleum Exporting Countries (OPEC), OPEC+, or non-OPEC nations. Responding to the highly dynamic economic and geopolitical developments, these groups make changes to their oil production capacities, which impact the oil supply levels and results in volatility in oil prices. As of April 2020, OPEC countries included the following 13 nations:

  • Algeria
  • Angola
  • Congo
  • Equatorial Guinea
  • Gabon
  • Iran
  • Iraq
  • Kuwait
  • Libya
  • Nigeria
  • Saudi Arabia
  • United Arab Emirates
  • Venezuela

OPEC’s 13 members control approximately 30 percent of global oil supplies and 79.4 percent of proven reserves. OPEC member nations produce about 42% of the world's crude oil, according to International Energy Agency (IEA), and OPEC's oil exports account for roughly 60% of the total petroleum traded worldwide. IEA also reports that more than 80% of the world’s proven crude oil reserves lie within the boundaries of the OPEC countries. Of that, roughly two-thirds lie within the Middle Eastern region. Additionally, all OPEC member nations have been continuously improving technology and enhancing explorations leading to further enhancements to their oil production capacities at reduced operational costs.

Top 15 Oil producers
  Country Crude Oil production (1000's barrels / day)
1 U.S.A 12,744
2 Russia 10,871
3 Saudi Arabia 9,784
4 Canada 4,630
5 Iraq 4,500
6 China 3,782
7 Brazil 3,107
8 U.A.E 2,990
9 Kuwait 2,665
10 Iran 2,080
11 Kazakhstan 1,949
12 Norway 1,785
13 Nigeria 1,742
14 Mexico 1,734
15 Qatar 1,520
{Source: tradingeconomics}

Within the OPEC group, Saudi Arabia is the largest crude oil producer in the world, and remains the most dominant member of OPEC, with each instance of a cut in oil production by them resulting in a sharp rise in oil prices, and vice versa. Additionally, the 'kingdom of Saud' is also the leading exporter of crude oil globally. Prior to 2000, all historical instances since the 1973 Arab oil embargo indicate that Saudi Arabia has managed to maintain its upper hand in the oil market. It calls the shots in determining crude oil prices by controlling supply. All major oil price fluctuations in recent history can be clearly attributed to production levels from Saudi Arabia, along with other OPEC nations.

OPEC+, which is the amalgamation of OPEC and non-OPEC nations like Russia, Mexico and Kazakhstan, controls over 50 percent of global oil supplies and about 90 percent of proven reserves. OPEC+ remains influential due to three primary factors:

  1. an absence of alternative sources equivalent to its dominant position
  2. a lack of economically feasible alternatives to crude oil in the energy sector
  3. the comparatively low-cost price advantage against the relatively high-cost non-OPEC production.
Top 15 Oil exporters
Top 15 Oil exporters.

{Source: worldstopexports}

Understandably, this gives OPEC+ a great deal of influence over the global economy. Simply put, OPEC+ has the economic capability to disrupt or enhance the supply of oil to substantial levels at any time, severely affecting the oil prices. For example, the 1973 Arab oil embargo by OPEC, saw prices quadrupling from $3 to $12 per barrel and, more recently, the sudden ramp up in production by Saudi Arabia in March 2020 led to sharp decline in the price of oil.

100 Million

The estimated number of barrels of oil consumed around the globe daily in 2019.

Non-OPEC Production Impact on Oil Prices

Non-OPEC oil producers refers to crude oil producing nations outside of the OPEC group and those producing shale oil. Interestingly, some of the top oil-producing countries are non-OPEC nations. This includes the United States of America, which is the number one producer, Canada, and China.

Since their own consumption levels were high, most non-OPEC countries had limited capacity to export, and were relegated to being net oil importers despite being high producers. This relegated them to the role of ineffective participants in the oil price determination process. However, with the discovery of shale oil and shale gas, non-OPEC oil producers, especially the U.S.A, enjoyed increased production and larger market share in recent times. While this has been a game changer of sorts, shale oil technology needs high upfront investments which acts as a deterrent to shale oil producers. 

So far, the evidence is inconclusive as to whether non-OPEC producers can have a material impact on the price of crude oil. High production levels from non-OPEC members during 2002 – 2004 and in 2010 did not result in price declines, and were instead accompanied by higher oil prices. This can probably be explained by the fact that they did not have the requisite market share to make a dent in the market price of oil. High production during 2014 – 2015, however, did see a decline in prices. Market pundits have opined that this was probably due to OPEC increasing supply to counter the threat posed to their hegemony by non-OPEC producers.

OPEC and non-OPEC vs Market Forces

Oil prices also have generous components of geopolitical developments and economic interests that have to be accounted for and factored into the price. Then there is always the "black swan" event that can greatly affect the supply / demand paradigm.

One such event surfaced in January 2020 when the global economy was roiled by COVID-19. The plummeting global demand for oil led to a fracturing of OPEC+, specifically between Saudi Arabia and Russia - the two largest exporters of oil, to the point where Saudi Arabia ratcheted up production substantially. This overt attempt to capture market share led to a precipitous decline that saw the price of WTI breach $20 / barrel. An "extraordinary" meeting between OPEC and non-OPEC (read: Saudi Arabia and Russia) led to an agreement to cut production by about 10 million barrels per day (bpd). In what was a classic buy-the-rumor-sell-the-fact trade, oil price rose and then cratered as the market was not impressed by a global supply cut of 10 million bpd while global demand is projected to decline by 30 million bpd.

The Bottom Line                                

The dynamics of the oil economy are complex, and the oil price determination process goes beyond the simple market rules of demand and supply, though at its most primal level the market is the final arbiter of the price of oil.

Under normal global market conditions OPEC+ should continue to maintain its dominance in oil price determination. Despite challenges, such as fracking technology and oil discovery in non-OPEC regions, OPEC's share of the global market is such that they can manipulate their production quotas to continue to be the key player in the oil price determination process.