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Understanding OPEC and OPEC+: Their Role in the Global Oil and Currency Market

by | Feb 21, 2024

The Organization of the Petroleum Exporting Countries, commonly referred to as OPEC is a group of 13 countries that are major producers of crude oil. These countries are Algeria, Angola, Congo, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, Venezuela, and Gabon.

OPEC was formed in 1960 with the aim of coordinating and unifying the petroleum policies of its member countries to secure fair and stable prices for petroleum producers and ensure a regular supply for consumers. Since then, OPEC has played a significant role in shaping the global oil market.

One of the most powerful tools at OPEC’s disposal is the ability to cut oil production. When OPEC reduces its oil production, it leads to a reduction in the global oil supply. This reduction in supply, in turn, leads to an increase in oil prices, as the market tries to balance the supply and demand equation.

The impact of OPEC’s production cuts worldwide can be seen in several ways:

 

  1. Oil Prices:

     Whenever OPEC reduces output, the amount of oil available globally declines. In turn, this causes the price of oil to rise. The cost of other commodities like petrol, diesel, and heating oil is impacted by rising oil prices. As the price of producing these goods rises as a result of increasing oil prices, their prices may also increase.

  2. Inflation: 

    Excessive oil prices might cause inflation in other economic sectors as well. Inflation can result when the price of products and services rises due to greater production costs brought on by rising oil prices.

  3. Global Economic Growth:

     Higher oil prices can also have a negative impact on global economic growth. When oil prices rise, it increases the cost of transportation and manufacturing, which can reduce economic activity and slow down economic growth.

  4. Stock Market:

     OPEC’s production cuts can also impact the stock market. Companies that produce and distribute oil, such as ExxonMobil and Royal Dutch Shell, can see their stock prices rise when oil prices increase due to OPEC’s production cuts.

  5. Currency Market:

     When OPEC cuts the supply of oil, it can lead to an increase in oil prices in the global market. Since oil is priced in US dollars, an increase in oil prices can lead to an increase in demand for US dollars. This is because countries that import oil, including the United States, will need to purchase more US dollars to pay for their increased oil imports.

  6. Impact on Indian Currency:

     When OPEC cuts the oil supply, it can lead to an increase in oil prices, which can impact the Indian currency against the US dollar. This is because India is one of the largest importers of crude oil, and a rise in oil prices can increase the country’s import bill, leading to an increase in the demand for US dollars. As a result, the value of the Indian currency against the US dollar may decrease when OPEC cuts its oil supply. This can make imports more expensive for India, leading to inflationary pressure on the economy.

 

What distinguishes OPEC and OPEC+ from one another?

Organizations active in the international oil market include OPEC and OPEC+. But there are some significant variations between the two.

The 13 nations that together make OPEC are the world’s top producers of crude oil.

OPEC+ is a group of oil-producing countries that includes 13 OPEC member countries plus 10 non-OPEC countries, including Russia, Mexico, and Kazakhstan. The formation of OPEC+ was a response to the global oil market’s changing dynamics and the increasing influence of non-OPEC oil-producing countries. The primary objective of OPEC+ is to coordinate oil production levels among its member countries to stabilize oil prices and reduce volatility in the global oil market.

The key difference between OPEC and OPEC+ is that OPEC is composed only of the 13 OPEC member countries, while OPEC+ includes both OPEC member countries and non-OPEC countries. The formation of OPEC+ has allowed OPEC to work more closely with non-OPEC countries to better manage global oil supply and demand dynamics. OPEC+ has also allowed non-OPEC countries to participate in the decision-making process, which has led to a more inclusive and coordinated approach to managing the global oil market.

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