Impact of OPEC’s output pact proposal

Context:

New discussions between OPEC+ countries which scheduled recently was reportedly called off as key players failed to make any progress in resolving key issues.

Relevance:

GS-II: International Relations (Important International Groupings, Foreign Policies affecting India’s Interests)

Dimensions of the Article:

1. About Organization of the Petroleum Exporting Countries (OPEC)
2. The Story so far regarding OPEC decisions and Oil Prices
3. How will this impact India?
4. Way Forward Options for India

About Organization of the Petroleum Exporting Countries (OPEC)

• The Organization of the Petroleum Exporting Countries is an intergovernmental organization of 14 nations, founded in 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela), and headquartered since 1965 in Vienna, Austria.
• As of 2018, the 14 member countries accounted for an estimated 44 percent of global oil production and almost 82% of the world’s “proven” oil reserves, giving OPEC a major influence on global oil prices that were previously determined by the so-called “Seven Sisters” grouping of multinational oil companies.
• The stated mission of the organization is to “coordinate and unify the petroleum policies of its member countries and ensure the stabilization 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.”

The Story so far regarding OPEC decisions and Oil Prices

• In April 2020, the OPEC+ group of countries had entered into a two-year agreement, which entailed steep cuts in crude production to deal with a sharp fall in the price of oil as a result of the Covid-19 pandemic – The price of Brent crude hit an 18-year low in April 2020 as economic activity around the world crashed as countries dealt with the pandemic.
• In November 2020, however, the price of Brent crude started climbing consistently as it was buoyed by the steady rollout of vaccination programmes around the world.
• OPEC+, however, maintained lower levels of production despite crude oil prices reaching pre-Covid levels which helped boost rising prices even further – (Saudi Arabia, notably, announced a further cut in production for the February-to-April 2021 period.)
• The OPEC+ group ran into sharp criticism from developing economies, including India, for deliberately maintaining low supply levels to raise prices.
• In April, OPEC+ agreed to gradually increase crude production including a phased end to Saudi Arabia’s 1 million barrel per day cut in production by July.

The Current Issue

• The UAE agreed that there was a need to increase crude oil production from August, but did not agree to a condition by the OPEC Joint Ministerial Monitoring Committee (JMMC) that the two-year production agreement be extended by six months.
• The UAE’s key objection to the existing agreement is the reference output used to calculate the total production apportioned to each oil-exporting country.

How will this impact India?

• If the UAE and other OPEC+ nations do not reach an agreement to increase production in August, expected relief in the form of lower crude oil prices could be delayed.
• India is currently facing record-high prices of petrol and diesel, with pump prices of the former exceeding Rs 100 per litre in several states and Union Territories.
• High crude prices have led to Indian oil marketing companies hiking the price of petrol and diesel by almost 20 per cent since the beginning of 2021.

Way Forward Options for India

• India needs pricing flexibility as well as the certainty of supply even during times when production falls due to any reason. Besides, choice of time of supply and flexibility on quantity (ability to reduce or increase) is what India should be looking at.
• Indian refiners can look to reduce the quantity they buy through term contracts and instead buy more from the spot or current market.
• Buying from the spot market would ensure that India can take advantage of any fall in prices on any day and book quantities. It’s like the stock market where shares can be brought on a day or time when the prices are low.
• State-owned refineries have also been asked to coordinate buying and also explore joint strategy with private refiners such as Reliance Industries and Nayara Energy.

-Source: Indian Express