OPEC’s landmark and long-expected deal to control crude oil production has lead to Oil prices in the international markets being raised marginally. In this post we would talk about the background of OPEC and the implications of the deal on India.
OPEC | What is it?
- Organisation for the Petroleum Exporting Countries (OPEC) is an oil cartel based in Vienna, Austria. It is a permanent, intergovernmental Organization, created at the Baghdad Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. OPEC had its headquarters in Geneva, Switzerland, in the first five years of its existence. This was moved to Vienna, Austria, on September 1, 1965.
- OPEC’s objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.
- Member countries – Algeria, Angola, Ecuador, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. It is to be noted that Russia is not a member of the cartel despite being one of the largest supplier of petroleum products.
- OPEC controls 1/3rd of the global oil output, therefore it has a direct impact on oil prices in the international market.
OPEC | What is the recent deal?
OPEC members have agreed to cut oil production from their present level of 33.8 million barrels per day to 32.5 million barrels per day, a decrease of 1.3 million barrels a day. This is significant because the forces of demand and supply guide the oil prices in the international market.
OPEC | Why the deal may have little impact?
- Saudi Arabia, the leader of OPEC, has increased output by a million barrels a day since 2014 and is proposing now to cut back that increase by just half. The marginal decrease might not be effective in controlling the forces of demand and supply, especially when the demand of petroleum is much lower than pre-2014 era.
- Russia, the major non-OPEC supplier that is a party to the agreement, might cut back production by 300,000 barrels a day, but that will still mean it is pumping more than it did earlier this year.
- Iran, who is facing ambiguities over return of sanctions by the new administration in the United States, has also increased production by one million barrels a day; to secure a deal.
- The demand from China has decreased due to the apparent slowdown in Chinese economy, which is not in sync with the current level of production. Even the stipulated levels of production post-OPEC deal are too high to match with the contemporary demands.
- OPEC is also facing stiff competition from Shale Gas economy of the United States who has turned self-dependent after the Shale revolution. The competitive cost structure has lowered down the prices of Shale production for the US and it has no reason to rely on the unreliable sources of oil supply from the Middle East. Moreover, the Petrodollar agreement with Saudi Arabia has also come to an end in 2010, therefore, the US is left with few economic interests in the region.
- The international community is facing a dilemma over the use of non-renewable sources of energy since the Paris Climate change agreement. There is a general transition towards the renewable sources of energy due to advancement of technology and competitive price structuring that has lowered down the cost of output.
OPEC | Implications for India
The recent agreement within the framework of OPEC has pulled the chairs of New Delhi who is relying on lower oil prices to fund its infrastructural bottlenecks with the savings from the oil bill. It might give initial discomfort to India, but as the deal is bound to produce little effect on the international oil prices in the long run, India can safely manoeuvre through its fiscal policies. It is prudent to maintain a comfortable margin in fiscal policy making which would provide enough leg room for the Indian economy to accommodate the structural changes in the oil and petroleum sector.
OPEC | Conclusion
Despite the initial monopoly over the oil and petroleum sector of the international market, the OPEC has little control over the crude oil prices now than it did in 2014. It would be quite exaggerating to conclude that OPEC has gone irrelevant in contemporary scenario but it is surely passing through a tough phase.