What is OPEC?
OPEC stands for The Organisation of Petroleum Exporting Countries. The aim of OPEC is to regulate supply and demand of oil throughout the world. It also aims to control the price of oil to ensure its members are getting a fair deal.
OPEC founder members:
- Saudi Arabia
- Qatar (1961)
- Indonesia (1962) Libya (1962)
- the United Arab Emirates (1967)
- Algeria (1969)
- Nigeria (1971)
- Ecuador (1973)
- Gabon (1975)
- Angola (2007)
- Equatorial Guinea (2017)
There are notable absences from this list, namely the US and Russia. Russia was initially invited and has been reinvited to join OPEC a number of times over recent years. It has so far refused to do so due to oil production not being controlled by the state but by a number of private companies. Any involvement in regulating supply would be seen as the Russian government controlling private industry. The US also gives similar reasons.
OPEC controls around 80% of all oil reserves along with close to 50% of natural gas and has been labelled a cartel due to its influence in keeping oil prices high. With the introduction of fracking, particulary in the US its influence has been undermined in recent years. Its ability to regulate the price of oil has seen it dip in price, going as low as $26 a barrel in December 2016.
The price of oil can fluctuate wildly on information releases by OPEC. If OPEC strike a deal to withhold production the price of oil will rise. Alternatively if OPEC members are in disagreement over policy then the price of oil can drop.
How oil prices affect the forex market.
The volatility on oil price can have a positive or negative affect on a countries economic strength, which in turn affects the value of its currency. For example Canada is a large producer of oil and its currency has a correlation to the price of oil because of this. If the price of oil comes down, then the Canadian Dollar loses strength due to this correlation. Although the US is the 2nd highest oil producer in the world behind Saudi Arabia its economy does not focus solely on oil production and therefore the reaction to the US dollar when the price of oil moves in minimal.
With technology surrounding electric and hybrid cars improving and the worlds shift toward green fuels, the long term price of oil is something to watch. The announcement that Volvo has recently pledged to only build electric or hybrid cars from 2019 may cause a domino affect amongst major car manufacturers to gradually switch to more environmentally friendly solutions. This large shift in production will force OPEC to re-assess its approach and manage its oil supply very carefully.
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