How does OPEC determine the prices of world oil?

Answer 1

Oil price is not directly decided by OPEC. Price of any commodity is decided by demand and supply equilibrium. Besides, in the case of oil, political factor plays a major role. Also valuation or devaluation of Dollar does affect oil price.

OPEC has only one factor in its control and that is 'production'. If production is increased so as supply is more than demand, prices are likely to fall. Vice versa is also true.

But other factors also play important role.

Answer 2

In the ideal world, supply and demand determine price. If producers reduce their output without a matching decrease in the amount being used, the price will go up. If production is increased without an increase in use, the price will go down. On the other side, if there is an increased demand for oil, prices will increase until production catches up or if there should be a sudden decrease in the amount of oil being used, producers will have to lower their prices because their competitors will. This principle works only to a point because the major oil producers (OPEC) have agreed to cooperate. Assuming total supply is equal to total demand, but this group controls 90% of the supply, they can agree on a selling price and refuse to sell for less. This would create an artificial shortage.