The measure is intended to revise falling oil prices that have been caused by an excess in supply.
14 petroleum producing nations have been constraint by a decision of the oil cartel to moderately limit their collective oil production this year in an effort to bolster dropping prices. It is the first time in eight years that the Organization of Petroleum Exporting Countries, OPEC, would lower output. It was the last oil price slump during the financial crisis in 2008. The agreement was reached on September 28, 2016 at a meeting in Algiers, Algeria. News agencies report that a global overabundance of oil supply caused prices to crash over the last two years, with OPEC nations led by Saudi Arabia refusing to lower production until now. Oil prices are reported to have increased by 5 per cent in reaction to the decision.
OPEC oil production is expected to be reduced to a range of 32.5 to 33 million barrels of oil per day from 33.4 million going by the agreement. Cartel members would decide at the group’s next formal meeting, on November 30 in Vienna, on details of trimming production by up to 700,000 barrels a day, from a current level of just over 33 million barrels a day. Meantime, the largest oil producer is expected to give up 350,000 barrels a day. Three countries are however exempted from the production cuts: Iran, Nigeria and Libya due to the economic sanctions that weighed on Iran and the destruction of some facilities by terrorists in Nigeria in recent months. Oil prices were as high as $100 a barrel in mid-2014. But the global oversupply caused prices to plunge to as low as $26 a barrel in February. The volatility in oil caused stock markets to dive at the beginning of 2016. In recent months, oil prices have rebounded a bit and oil is currently hovering near $47 a barrel.
Energy experts however argue that while the OPEC arrangement may strengthen oil prices in the short term, it probably will have little long-term effects. It comes at a time when seasonal oil demand decreases, particularly some Western countries, where people drive less. And like in some other OPEC supply agreements in the past, it may not hold or it may be subject to cheating. In a statement, OPEC said that it had concluded that the market surplus was not going away any time soon. “It is not advisable to ignore the potential risk that the present overhang may continue to weigh negatively well into the future,” the group said.