10 Apr 2023 OPEC

OPEC

This article covers “Daily Current Affairs for UPSC” and the topic is about ‘OPEC’ which is in news, it covers “INTERNATIONAL RELATIONS” In GS-2; the following content has relevance for UPSC.

OPEC

For Prelims: OPEC
For Mains: GS-2, International Relations

Why in news: The coalition of oil producers known as OPEC+ announced it would cut oil production by 1.66 million barrels per day. That includes a previously announced cut by Russia of 500,000 barrels per day—some of which was likely to drop out of the market anyway because of Western sanctions. Given supply disruptions in Iraq and elsewhere, the actual cut to current global production will be a bit less than 1 million barrels per day.

About OPEC

• OPEC stands for the Organization of Petroleum Exporting Countries. It is an intergovernmental organization that was founded in 1960 by five countries: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. OPEC’s headquarters is located in Vienna, Austria.
• The main objective of OPEC is to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets in order to secure a steady income for its member nations. OPEC is known for its role in influencing global oil prices and production levels.
• As of my knowledge cutoff date is in September 2021, OPEC has 13 member countries, which include Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela. These member countries collectively account for a significant portion of the world’s oil reserves and oil production.
• OPEC holds regular meetings where member countries discuss and coordinate their oil production levels and policies. Decisions made by OPEC can have a significant impact on global oil prices and supply, as the organization represents a significant portion of the world’s oil production.
• However, OPEC’s influence on global oil markets has evolved over time, and its decisions are also influenced by various geopolitical, economic, and environmental factors.

About OPEC+

• OPEC+ refers to a group of oil-producing countries that includes the member countries of the Organization of the Petroleum Exporting Countries (OPEC) as well as a group of non-OPEC oil-producing countries that collaborate with OPEC on oil production and supply management. OPEC was founded in 1960 and currently consists of 13 member countries, primarily located in the Middle East, Africa, and South America, which together account for a significant portion of global oil production.
• In 2016, in an effort to address global oil market challenges and stabilize oil prices, OPEC initiated a partnership with several non-OPEC countries, including Russia, Kazakhstan, Azerbaijan, and others, to coordinate on oil production policies. This partnership between OPEC and non-OPEC countries came to be known as “OPEC+”.
• The primary objective of OPEC+ is to collectively manage oil production levels and coordinate supply adjustments in order to stabilize global oil markets and support oil prices. OPEC+ countries hold regular meetings to discuss and agree upon production quotas and other measures aimed at managing oil supply and prices in the global market. The decisions taken by OPEC+ countries, such as production cuts or increases, have the potential to impact global oil prices and have significant implications for oil-consuming and oil-producing countries around the world.

 The context behind the News

• Saudi Arabia, Iraq, the United Arab Emirates, and Russia, among other major oil-producing countries, have planned curbs on oil output that will begin in May. The statement immediately increased crude oil prices.
• The Organization of Petroleum Exporting Countries (OPEC) acknowledged the crude oil output curbs imposed by major oil-producing countries at its 48th Joint Ministerial Monitoring Committee meeting.

Why are OPEC+ countries reducing crude oil output?

• The decision to reduce crude oil production was made to help market stability.
• Russia declared in February 2023 that it will reduce crude oil production by half a million barrels per day after Western countries limited the price of its crude in reaction to the Ukraine crisis.
• In December 2022, the G-7 group of advanced economies set a price cap of $60 per barrel for Russian crude oil.
• Furthermore, recent developments in the banking sector in the United States and Europe, such as the failure of Silicon Valley Bank and the upheaval at Credit Suisse, have fueled fears of an impending recession.
• The production decrease is also intended to punish short sellers who bet on falling oil prices.
• Saudi Arabia will reduce 500,000 barrels per day, Iraq 2,11,000 barrels per day, the United Arab Emirates 1,44,000 barrels per day, Kuwait 1,28,000 barrels per day, Kazakhstan 78,000 barrels per day, Algeria 48,000 barrels per day, Oman 40,000 barrels per day, and Gabon 8,000 barrels per day.
• These cuts come on top of the two million barrels per day reduction announced in October 2022. Earlier this year, Russia announced a decrease of 500,000 barrels per day.

Impact of these cuts on India

According to data from the World Energy Outlook 2021, India ranks third in the world in crude oil imports, trailing only China and the United States, while ranking 21 in crude oil output and 26 in natural gas production. The impact of OPEC cuts on India, like any other country, can be both positive and negative, depending on various factors. Here are some potential impacts:

• Oil prices: OPEC cuts, if successful in reducing global oil supply and supporting oil prices, can result in higher oil prices in international markets. This can have a negative impact on India, which is a major oil importer and relies heavily on imported crude oil to meet its domestic energy needs. Higher oil prices can increase India’s import bill for oil, leading to higher costs for consumers, businesses, and the economy as a whole. It can also put pressure on India’s current account balance and fiscal position.
• Inflation: Higher oil prices resulting from OPEC cuts can also lead to inflationary pressures in India, as it may increase the cost of production for various goods and services, including transportation and logistics. This can potentially impact consumer prices, and the central bank may need to take measures to manage inflation, which can have broader economic implications.
• Fiscal impact: India, like many other countries, levies taxes on petroleum products, and higher oil prices resulting from OPEC cuts can impact government revenues. If the government chooses to absorb the increased cost by not passing it on to consumers through higher fuel prices, it may lead to higher fiscal deficits or increased government borrowing, which can impact the country’s overall fiscal health and economic stability.
• Energy security: OPEC cuts can also impact India’s energy security concerns. India has been working towards diversifying its energy sources and reducing its dependence on fossil fuels, including crude oil, by promoting renewable energy and domestic exploration of oil and gas. If OPEC cuts lead to higher oil prices or supply disruptions, it may impact India’s energy security plans and strategies.
• Geopolitical considerations: OPEC cuts can also have geopolitical implications for India. Some OPEC member countries are major players in global politics, and any changes in their oil production policies or decisions can impact India’s geopolitical relations with these countries, as well as other countries involved in the global oil market.

Way Forward

India can take several steps to curb the impact of OPEC cuts on its economy. Here are some potential measures:

• Diversify energy sources: India can continue its efforts to diversify its energy sources by reducing its dependence on crude oil and promoting alternative sources of energy, such as renewable energy, nuclear energy, and domestic exploration of oil and gas. This can help reduce India’s vulnerability to oil price fluctuations resulting from OPEC cuts and enhance its energy security.
• Strategic reserves: India can build and maintain strategic reserves of crude oil to ensure a buffer against supply disruptions or price spikes resulting from OPEC cuts. Strategic reserves can provide a cushion during times of crisis and help stabilize domestic oil supplies.
• Energy efficiency and conservation: India can focus on improving energy efficiency in various sectors, including transportation, industry, and buildings, to reduce its overall energy demand and consumption. Conservation measures, such as promoting public transportation, optimizing logistics and supply chains, and promoting energy-saving technologies, can help reduce the impact of higher oil prices resulting from OPEC cuts.
• Diplomatic engagement: India can engage in diplomatic efforts to maintain stable and constructive relations with OPEC member countries and other major oil-producing countries. This can involve regular dialogues, negotiations, and collaborations to ensure stable oil supplies and prices that are favorable to India’s interests.
• Economic and fiscal policies: India can adopt appropriate economic and fiscal policies to manage the impact of OPEC cuts on its economy. This can include measures such as targeted subsidies for vulnerable sectors or consumers, prudent fiscal management to mitigate the impact on government finances, and policy measures to manage inflationary pressures resulting from higher oil prices.
• Diversify oil import sources: India can explore and diversify its sources of oil imports to reduce its reliance on OPEC countries. This can involve increasing oil imports from non-OPEC countries or exploring opportunities for domestic oil production to reduce its vulnerability to OPEC cuts.
• Strategic alliances: India can consider forming strategic alliances with other oil-consuming countries or regional organizations to collectively address the impact of OPEC cuts. This can involve joint efforts to negotiate favorable oil supply contracts, pool resources to build strategic reserves or collaborate on energy efficiency and conservation measures.

Source:

• Foreignpolicy.com

Get Daily Current Affairs from Yojna IAS

saurabh kaushik