Opec cuts production – a lesson in supply and demand

Opec agrees to cut output in the hopes that this will stabilize prices.  By reducing the supply of oil, they hope to drive prices up.  However, this plan could backfire if the drastic price reduction is being driven by lower demand.  Demand doesn’t appear to be rising, despite the record low price per barrell, so cutting production to raise oil prices certainly won’t increase demand, either.  If anything, higher prices will drive down demand even further.

It’s possible that oil surpluses in the markets are dampening the price, and the real demand remains high.  So, cutting production could bring prices back to some mutually happy level.  However, if the production cut raises prices and those prices affect demand, Opec will be losing even more money and prices will have to drop, despite the cut in production.

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