OPEC price control strategy

The OPEC cartel has pursued a high price strategy in an oil market under pressure from rising demand. While it may have encountered short-run capacity constraints, OPEC did not commit to increase oil output and bring the price to a lower, more manageable level. Instead, it has actually cut oil output intermittently. Since last November, it decided to reduce its rate of production by 1.7 million barrels per day (b/d) in an apparent effort to keep the price of crude oil from falling below roughly $50 per barrel, and it still has given no guidance as to what it regards as an upper bound. This conduct tests the limits of what the market will bear; it does not aim to keep the price stable. Hence, price volatility does not imply weakness by the cartel. In the four years since the price began to exceed OPEC’s previous target price band of $22 to $28 per barrel, its oil revenue more than tripled from $183 billion in 2002 to $580 billion in 2006 while the cartel increased oil output by a mere 17 percent.1 High prices are prone to be volatile and difficult to control, and $50 to $60 is extremely expensive for a barrel of crude oil.