If you have been following the news channels over the past 24 hours, you are likely to have seen headlines about an increase in the price of a barrel of oil. The rise has come about after the Saudi-led Opec cartel agreed to cut oil production by 1.2 million barrels per day – the first time the organisation has cut production for eight years. 

The announcement has sent the price of a barrel of oil soaring and left many people around the world wondering what impact the decision would have on their daily lives. With that in mind, here is our guide on why the decision to cut production has been made and what it might mean for consumers.

What Is Opec?

Established in 1960, the Organisation of the Petroleum Exporting Countries (Opec) is an intergovernmental organisation. Its aim is to “coordinate and unify the petroleum policies of its member country and ensure stabilisation of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.”

At present the organisation has 13 members – Algeria, Angola, Ecuador, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirate and Venezuela. A fourteenth member – Indonesia – temporarily suspended its membership this week. Combined, they account for 43% of all oil pumped globally and 75% of all oil reserves.

Why Have Opec Decided to Cut Production? 

It has been a turbulent few years for the price of oil. Between 2010 and the middle of 2014, the price of a barrel held steady at around $110, even reaching $115 at one point. Since then, the price has since plummeted – falling below $30 a barrel in February of this year. As the year, has gone on it has recovered somewhat and rose by $4 a barrel to just over $50 upon news of the deal.

However, this low price has been hurting the economies and government finances of Opec members. In 2015, Deutsche Bank and the IMF estimated that Opec members needed the price of oil to increase to $77 in the case of Qatar and to $184 in the case of Libya just to balance the books. Opec have therefore decided to cut production in order to raise the price.

Will All Parties Comply with The Deal?

The deal rests heavily on Saudi Arabia, who have agreed to cut production by 4.5% - approximately half a million barrels a day. Putting it simply though, it is unlikely – or maybe inevitable that there will be some cheating. Neil Wilson or ETX Capital said “compliance is key and it’s worth noting that Opec members don’t have the best record on that front.”

What Does the Price Rise Mean for Us?

So, what will the price rise mean on us as consumers? Well the AA estimates that should oil prices reach $60 a barrel, petrol prices could increase by as much as 9p per litre – something which would add around £5 to the costing a filling up the average family car. Consumers will also feel the pinch through their energy bills, as the price of wholesale gas tends to track that of crude oil.

Simon Williams, RAC fuel spokesman, added that consumers in the UK can expect an even tougher time. With oil traded in dollars, the weak pound is likely to push prices up even further.