What's going on?

Remember that deal between oil-producing countries who wanted to limit their oil production in the hopes of boosting the price? Well, according to two reports this week, their production is increasing � and yet the oil price has risen anyway. What gives?

What does this mean?

Late last year, twelve OPEC members agreed to cut their oil production, but since virtually the beginning of the deal, several members have produced more than they said they would. To compensate, Saudi Arabia, the biggest producer, decreased its production by an even greater amount than it had planned. However, it appears that Saudi Arabia is changing tack: in June, it produced more than it was supposed to under the agreement.


But, despite the unexpected boost in production, the oil price has risen from a low close to $42 per barrel a few weeks ago to around $45. Why? Seemingly because demand for gasoline in the US has been higher than anticipated and is pushing up the oil price, at least for the time being.

Why should I care?

The bigger picture: The current price of oil is putting pressure on OPEC members� finances.

Most OPEC members, including Saudi Arabia, use the proceeds they get from selling oil to fund relatively generous state subsidies for things like health and social welfare. Goldman Sachs says OPEC members need oil at $70 per barrel for their governments to �break even�.

For markets: A low oil price discourages attempts to find new oil � which could lead to a higher oil price in the future.

Since the price of oil is relatively low these days, many major oil companies have cut back on developing and exploring new oil fields in higher-cost locations � thus, possibly limiting the future supply of oil. However, global demand for oil continues to climb at a reasonably steady pace � even with increased competition from renewable energy. At some point, the world could start running low on oil � which would be positive for its price. But even those in the oil industry think this is at least a few years away.