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How Does OPEC Influence Gas Prices?

Gasoline is made from crude oil, the price of which is controlled, in part, by OPEC.
Saudi Arabia was an original member of OPEC.
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  • Written By: Margo Upson
  • Edited By: Bronwyn Harris
  • Images By: Sint, Chuck Hagel
  • Last Modified Date: 20 July 2014
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Americans drive three trillion miles a year, equal to 820 trips between Pluto and the sun. The United States uses 178 million gallons of gasoline a day. A spike in gas prices affects everything from the cost of bread to the amount of taxes available for community needs. A sharp rise or fall, instead of more gradual movement, can have a huge impact on the world's economy. Gas prices are largely controlled by OPEC, or the Organization of the Petroleum Exporting Countries, an organization that includes Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

Before 2009, Indonesia was a member of OPEC, but chose to suspend its membership in January of that year. The organization's 12 countries control 40% of the world's crude oil supply. This puts it in the unique position of having a lot of influence on the price of gas around the world.

OPEC controls gas prices by either increasing or decreasing the amount of oil available. If the amount available goes down, the prices go up. This is the law of supply and demand. The organization may choose to lower their available inventory by slowing down production or by putting more of the oil produced into reserves. To increase the amount of oil available, the members begin to produce more oil, or open up their reserves as inventory.

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This increase or decrease in supply can affect the cost of oil in indirect ways as well. If the amount of oil is decreased, the price of crude oil increases, but not only due to the amount of oil available. Gas production companies, the companies responsible for refining and then selling the oil, may get nervous over a decrease in crude oil coming from these countries. To protect their profits from further decreases, they may raise gas prices even more. Just the threat of decreases in oil production can raise gas prices.

The purpose of OPEC is to try preventing any sudden, extreme changes in gas prices. If one country is not producing as much oil as normal, they have other countries pick up the slack to stabilize the market. They are responsible for keeping the gas prices from falling too low, normally trying to avoid prices of below $50 US Dollars (USD) a barrel.

The members meet twice a year, in March and September, to discuss the world economy and oil production rates. New policies may be voted on, new memberships approved, and a chairman of the board is voted into place. Each member country sends a "governor" to the meeting, who is a representative of his or her country, and casts votes based on the needs of that country. OPEC may also call special meetings in times of crisis if there is a problem that needs immediate resolution.

The cost of crude oil controls more than just the price of gasoline; heating costs are also affected. Higher gas prices also influence the cost of travel. If gas prices are high, car buyers are more likely to buy smaller, more gas efficient vehicles. Fewer families can afford to travel, decreasing the money brought into the economy by tourism.

The United States, Canada, Mexico, Russia, and China, among others, all produce oil, although they are not members of OPEC. It is hoped that through better refining techniques and more research in other forms of energy, the world's need for gasoline can be greatly reduced, thus reducing the influence of this organization on the price of gas.

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Discuss this Article

anon961883
Post 5

What can we do to stop gas prices from rising?

Alchemy
Post 3

@ Babalaas - You have to doubt the stated intentions of OPEC as solely an organization meant to stabilize oil prices. There is a power struggle between the top oil producing nations in OPEC as to which one should be the ideological leaders of the region. Saudi Arabia and Iran are OPEC's number one and two oil producers respectively, and they are each trying to become the Middle East’s super power. It has almost become a battle of whose ideals, Iran's Shiite Muslim ideology or Saudi Arabia's Salafi Fundamentalist ideology, will hold sway over the Muslim world.

Both countries use their oil revenues to prop up various charities, madrasahs, and government agencies with the hopes of spreading their world views. The oil consumption of the western world, China, and India has also led to the deterioration of democracy in places like Russia, South America, and parts of Southeast Asia. If you want to read a good book that examines global petro politics, I would recommend reading Thomas Friedman's "Hot, Flat, And Crowded". It goes into great detail about politics, petroleum, and alternative energy and their influences on an overpopulated, globalized world.

Babalaas
Post 2

@ Anon68894 - I agree with you that Americans need to conserve and more efficiently utilize petroleum based fuels. I would, however, like to add that the greed is on all sides. Our inability to curtail our consumption has led to a crashing economy, and has made many of these oil producing nations extremely rich. Oil prices work on both supply and demand and increasing the supply does nothing but increase demand. Supply and demand is a self-correcting concept. Once there is a glut of cheap oil, regulations on energy efficiency become lax and market forces create products that consume more energy. Whether it is automobiles, farming practices, textile manufacturing, or any other good, efficiency tends to increase only when costs go up.

For decades we have had the technology to produce more efficient vehicles, electricity, food production techniques, and appliances, but the need has only arisen since crude has topped $90 a barrel. Even at the current price of $75-$80 per barrel, congress and the public are wavering on the need to reform energy policy. However, should gas prices hit the $3.30 per gallon mark before midterm elections you better believe that all Americans will change their tune on reforming American energy policy.

This illustrates the major flaw in capitalism; that it causes the market to focus on short term economic drivers, and ignore long-term consequences. This is where a government is supposed to step in. When prices of energy are cheap, the government should analyze the long-term prospects of energy prices. For example, when we were paying $1.50 a gallon for gasoline some of the subsidies for petro companies should have been reduced and re-directed to developing renewable energy and increasing efficiency. If adaptive energy policies are created, the sticker shock will be much less severe when energy prices spike (either due to decreased supply, instability, declining reserves, etc). I agree that OPEC nations have been raising prices due to greed, but only because the World’s industrialized nations have allowed oil to become their opiate.

anon68894
Post 1

When will the world powers realize that the main reason gas prices are so high is one major factor: greed.

Before prices went sky high, gas was around $1.50 per gallon. Everyone made good net profits.

Now everyone has jumped on the greed wagon. Groceries, gas, pencils blah blah. World powers should combine their efforts and tell the opec people "lower prices or eat sand". But governments are making money too.

So how do we fight greed? Well "all" drivers need to cut back more. Car pool, stay home on holidays. Make opec eat their crude oil. It worked in the 70s. It will work now.

Also boycott brand name groceries whenever possible. C'mon a bag of jays potato chips cost $4.99. Since when do potato chips cost that much? Go to Aldi: the same thing is $1.89.

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