http://www.cnn.com/2003/BUSINESS/01/12/opec.meeting.lead/
reading this, it says OPEC wants to keep prices between 22-28, and will change production to meet that demand. My question is why are they doing that? Why aren’t they trying to drive the price of oil up as much as possible?
One reason is that if they charge excessively high prices for oil, the economy of their customers will, at a certain level, begin to decline because of the high cost of such a ubiquitous and necesary good. Economic slowdown leads to reduced oil consumption, and reduced overall profit. So it’s good for both us and them to keep the price in a certain range, to keep our economy going strong.
And beside, if they raise it much higher, the US will bomb the sh*t out of them.
Don’t be ridiculous.
Essentially, SenorBeef has the answer. The reason is that OPEC is not a singular monopoly, but a cartel in an industry with several nonmember producers. The cartel must strike a balance in price between the members with lots of reserves and those with little. The ones with few reserves want as high a price as possible since they are really only interested in the short term, while the members with lots of reserves must take a more reasonable approach to pricing since they want to make the economics of alternatives more costly compared to oil. Moreover, the higher the price of oil, the more oil the nonmembers will produce - driving the price down. $22 - $28 per barrel is the price at which OPEC believes nonmember production and development of alternatives will be kept at a minimal rate to preserve the long term profitability of oil while bringing in enough profits to placate the short-term producers.
Plus, the higher the price of oil goes, the more incentive the US has to invest in alternative fuels.
In the past whenever oil prices have gone through the roof, cries have gone out to reduce our dependency on foreign oil. Typically these cries last until the price drops enough to make the alternative fuels more expensive than good old light sweet crude.