OPEC+ countries announced a voluntary oil production cut of 1.16 million barrels per day, which could impact the Indian economy, which depends on oil imports for 85% of its energy needs.
Recent trend in crude oil prices
- Crude oil prices crashed in April 2020 due to the pandemic and recovered when economies opened up.
- Subsequently, prices rocketed in early 2022, but then the global economy slowed and a recession in advanced markets looms large.
- This has resulted in declining demand for crude oil from major economies, causing oil prices to start falling again.
What is OPEC+?
- OPEC+ is a group of oil-producing countries that cooperate to manage the global supply and prices of crude oil.
- It is made up of the Organization of the Petroleum Exporting Countries (OPEC) and a group of non-OPEC countries, including Russia, Mexico, Kazakhstan, and others.
- OPEC was founded in 1960 by five countries: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
- The organization’s primary objective was to coordinate and unify petroleum policies among member countries to secure fair and stable prices for petroleum producers and a regular supply for consumers.
Key functions of OPEC+
- Oil Production Regulation: OPEC+ regulates oil production of its member countries to ensure that oil prices remain stable and there is no oversupply or undersupply of oil in the market.
- Price Control: It aims to control the price of crude oil by regulating the supply of oil to the market.
- Market Monitoring: OPEC+ closely monitors the global oil market to understand the demand and supply dynamics of oil.
- Coordination: OPEC+ member countries work together to make decisions on oil production levels, pricing policies, and other matters that impact the global oil market.
- Research and Development: OPEC+ invests in research and development to explore new technologies and methods that can help member countries to produce oil more efficiently and sustainably.
Reason behind recent production cuts
- OPEC+ countries aim to support market stability by reducing oil supplies.
- The recent production cuts, totalling 3.7% of global demand, will raise crude oil prices per barrel and help cover up the losses producer countries faced after prices crashed.
Impact on Indian economy
- India is the third-largest oil consumer and imports 85% of its total crude oil requirement.
- The cut could raise crude by $10/barrel, increasing import bill and worsening the current account deficit by around 0.4% of GDP.
- This will impact foreign exchange reserves and result in the depreciation of the rupee, which in turn can increase imported inflation.
Impact on common people
- If the rise in crude oil import bill is passed on to the public, it may lead to cost-push inflation as every economic activity gets affected by oil price movement.
- On the flip side, state-controlled oil marketing companies may be stopped from passing on the increased burden to consumers, further worsening the financial balance of the oil public sector units.
Alternatives for India
- India can turn to Russia for more supplies of cheap crude, but of late there has been a small decline in Russia’s share in India’s oil imports.
- As a long-term strategy, the government should focus on alternative energy sources and building better roads.
- The government should work on bringing petroleum products within the goods and services tax, and promote energy-efficient use of vehicles or an eco-driving culture.
