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Who sets global crude oil prices?
Commodity Online | June 12, 2008 09:31 IST
As crude oil is setting the global economy on fire and igniting fears of recession, there is a frequent question people ask. Who sets the oil prices?
The answer generally comes: oil price is set by the Organization of Petroleum Exporting Countries, a permanent intergovernmental oil organisation, created in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.
But the fact is that it is not OPEC that sets the global oil price. One of the most common misconceptions about OPEC is that the organisation is responsible for setting crude oil prices.
Although OPEC did in fact set crude oil prices from the early 1970s to the mid-1980s, this is no longer the case. It is true that OPEC's member countries do voluntary restrain their crude oil production in order to stabilise the oil market and avoid harmful and unnecessary price fluctuations, but this is not the same thing as setting prices.
In today's complex global markets, the price of crude oil is set by movements on the three major international petroleum exchanges, all of which have their own Web sites featuring information about oil prices.
They are the New York Mercantile Exchange (NYMEX, http://www.nymex.com), the International Petroleum Exchange in London (IPE, http://www.ipe.uk.com) and the Singapore International Monetary Exchange (SIMEX, http://www.simex.com.sg).
OPEC does not control the oil market. OPEC member countries produce about 45 per cent of the world's crude oil and 18 per cent of its natural gas.
However, OPEC's oil exports represent about 55 per cent of the crude oil traded internationally. Therefore, OPEC can have a strong influence on the oil market, especially if it decides to reduce or increase its level of production.