OPEC Cuts Production

The Organization of the Petroleum Exporting Countries, or OPEC, announced today that they are cutting production by 2.2 million barrels per day. To put that number into perspective, world oil consumption is 80-85 million barrels per day, so they are cutting production by about %3. Additionally, Russia and Azerbaijan, two non-OPEC oil producers, also announced production cuts.

This is not a trivial amount, however oil prices did not immediately go up today in response to the news. Basic economic theory predicts that a cut in supply will increase the price, which is exactly what these countries are trying to do. Rather than sell their product at $45/barrel, it makes a whole lot more sense to sell it for $60, $70, or $80+. Keep in mind that their oil reserves are finite--eventually it's going to run out--so they want to make as much money as possible while they still have it.

As an aside, simply because it is incredible, let's work out daily worldwide oil consumption. One barrel of oil is 42 gallons. Humans use 80-85 million barrels a day, which is about 3.5 billion (billion!) gallons of gas per day. In a world where billions of people do not even have a car, humans consume about half a gallon per person, per day. This average is misleading because people in countries like the United States use a much higher percentage. Pretty astounding numbers.