Strait of Hormuz

Assessing the threat to oil flows through the Strait

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OPEC monitors the world oil market using an OPEC "reference price" based on the average price of a basket of various oil streams. Substantial price fluctuations can trigger revisions in OPEC production levels. However, in recent years, market prices have increased without equivalent adjustments in production levels.

One reason OPEC is reluctant to increase production despite record high prices is the steady devaluation of the dollar in 2007 and early 2008. To maintain a constant real price of oil " the actual value to producers and consumers " the nominal price must increase to compensate for the declining purchasing power of each dollar paid for a barrel of crude oil. Furthermore, many factors other than supply, such as economic conditions in key markets, affect the price of oil. OPEC members have generally denied President Bush's requests to increase production, because they fear that an economic slowdown among consumer economies (perhaps caused by problems in the financial sector) will reduce demand in the near term.

Because the majority of OPEC production lies in the Persian Gulf region, OPEC might struggle to supply global markets after a disruption in the Strait of Hormuz, despite OPEC members' relatively easy access to low-cost oil fields.

[i] Energy Information Administration, Country Analysis Briefs: OPEC (March 7, 2006). Online. Available: http://www.eia.doe.gov/emeu/cabs/opec.html. Accessed: March 2, 2008.

[ii] Organization of Petroleum Exporting Countries, What is OPEC? (October 2007), p. 13. Online. Available: http://www.opec.org/library/what%20is%20OPEC/WhatisOPEC.pdf. Accessed: February 13, 2008.

[iii] Organization of Petroleum Exporting Countries, What is OPEC? (October 2007), p. 21. Online. Available: http://www.opec.org/library/what%20is%20OPEC/WhatisOPEC.pdf. Accessed: February 13, 2008.

This page last modified in August 2008

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