Under substantial pressure from the United States, the Organization of Petroleum Exporting Countries has decided to increase crude oil production. It is a smart move. Increased production should lower oil prices worldwide, which will ease inflationary pressures. The U.S. contribution to the decision-making process is another matter, however. The appearance of bowing to pressure from Washington could return to haunt the organization -- as well as the U.S.
Under last week's agreement, nine of the 11 OPEC members will increase production by 7 percent, or about 1.45 million barrels per day, to 21.07 million bpd. A 10th member, Iran, first refused to participate in the accord, but later reversed itself and said it would pump to the allocation granted in the deal. In total, OPEC output will climb 1.72 million bpd. However, some OPEC states already exceed their production quotas, so the real increase in OPEC production is only 600,000-800,000 bpd. When combined with increases from non-OPEC producers, there will be around 1 million bpd of new oil on the market.
Oil prices are not too high in historical terms. The spike of the last few months, when crude hit $34 per barrel, was an anomaly. For most of the decade, it hovered around $20. After peaking, the price had fallen to $27 as markets anticipated an agreement amid furious jawboning from Washington. The decline should continue.