Dec. 2003 — Q: Which OPEC nation did not raise its oil prices, when the other OPEC nations raised their prices? Why? — Emily (tenth grade student), Michigan
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A: It may seem like OPEC countries can just raise oil prices whenever they want to — and in a way they do. But oil prices are set every day (every minute, actually) by oil traders in commodities exchanges in places like London, Chicago and New York. (You may have seen pictures of them jumping up and down waving their arms and yelling at each other.) They’re buying oil for people who actually use it. But they’re also betting on where prices will head next — buying and selling contracts to buy oil. And those contracts rise and fall in price based on all sorts of news.
The news traders care about most all boils down to a basic question: Is there more oil out there — or less — than there are people who need it? When there’s lots of oil, and demand is low, it’s harder to sell those contracts — so the price goes down. (Just like trying to sell that Beanie Baby on eBay that everyone already has.) When there’s not enough oil to go around, demand gets bigger than supply, so the price goes up. (If you’ve got something everyone wants — like the last two tickets to a Beyonce concert — you can get top dollar.)
That’s why OPEC meets and decides, several times a year, how much oil each member is going to pump out of the ground. By adding or cutting back on supply, they try to control prices. (Sometimes, just the news that OPEC decided to cut production makes prices jump.) Over time, oil traders watch for government and industry reports showing just how much oil is really out there. Often, OPEC countries don’t do what they say they’re going to do: They’re notorious for “cheating” and pumping more oil than they said they would. And there are all sorts of forces that OPEC can’t control: How cold the weather is, say, or what other non-OPEC countries like Russia decide to produce.
The OPEC country most people watch (and listen to) closely is Saudi Arabia — because it has the biggest pool of oil in the ground and produces the most every day. Most other OPEC countries are already pumping as much as they can, so Saudi Arabia has the greatest influence on the flow of oil. If and when Iraq develops it oil industry, that could change. But that’s a subject for another day.
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