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OPEC meetingis implication for India (Relevant for GS Prelims, GS Mains Paper II; IOBR)

Ahead of the biannual meeting of the Organisation of the Petroleum Exporting Countries (OPEC) in Vienna Friday, international news organisations were reporting that crude exporters were close to a “deal”. What could this be?

OPEC might ultimately decide to pump another 500,000 to 600,000 barrels per day (bpd), significantly less than the 1.5 million bpd that Russia — which is not a part of OPEC but is, along with Saudi Arabia, the world’s largest oil producer — wants to raise output by. Khalid al-Falih, Energy Minister of Saudi Arabia, the de facto leader of OPEC, said Thursday that an increase of 1 million bpd might be “a good target to work with”.

Russia and OPEC reached a deal in December 2016 to cut production by 1.8 million bpd, which has helped lift oil prices by nearly three times since then. Russia’s commitment to the agreement has been weakening of late, and it wants an immediate increase in output with the option to recalibrate later. However, OPEC members including Iraq, Iran and Venezuela do not have spare capacity like Saudi or Russia, and do not want enhanced limits. They would not be able to contribute to the extra volume while suffering a lower price as supplies increase. A 500,000-600,000-bpd increase in output would be sufficient to overcome the decline in output from Venezuela, Angola and Mexico, to which Iran would have no objection, while keeping the market from overheating.

Prospects of the deal at OPEC were reported to have increased after Iran agreed to a “small increase”. Why was Iran opposed to increasing output
Each OPEC country has a notional price of oil which it uses to balance its national budget. Those with no other major revenue stream like taxes or remittances to fund their subsidies and social welfare programmes, see the magic number around $80 a barrel. But Russia, which has other exports, considers $68 a barrel to be sufficient to meet its expenditure. Any increase in oil output will lead to a softening of prices, and oil-led economies will end up earning less for the same volumes, thereby leading to budget deficits.

There’s also geopolitics. Iran, the Saudis’ great adversary in the Middle East, is smarting under US President Donald Trump’s decision to pull out of the 2015 nuclear accord, and wants to convey its hold on the cartel while mopping up as much oil revenue as possible before sanctions kick in. Saudi, on the other hand, is pushing for extra oil in line with Trump’s request; it also needs the cushion to attract investors for Saudi Aramco’s IPO likely early 2019. A three-way deal with Russia and a consortium of American oil giants would push Iran even further into a corner.

So is there a list of factors that influence decision making at OPEC?
Essentially, OPEC tries to ensure its members’ market share in crude oil while keeping an eye on its price, so that their major source of income remains lucrative. But as is clear, negotiations and coordination between the 14 members is key. Like any cartel, each member tries to cheat, and connives against the others. Everything matters, right down to VIP seats for the opening match of the Football World Cup.

2014 onward, the Saudis started to float more oil in the global market to bottom out prices. A fall below $40 a barrel prevented shale oil from flowing out of the US and helped maintain the Middle East’s hegemony in the oil world. And when shale shops in the US stemmed production, the Saudis got Russia and other non-OPEC players to agree to a cumulative 1.8 million bpd-cut in 2016.

But a tightening market coupled with strong global demand spiked prices beyond $80, thereby signalling the rejuvenation of shale shops. Infrastructure constraints in the US has so far kept a large chunk of shale oil away from global markets, but once these bottlenecks are cleared, US entrepreneurs will be able to reverse the world’s energy flows. A marginal increase in crude production could stall the shale oil gush from the US and Canada. Since most nations — including Saudi and Russia — have had to dip into their sovereign wealth funds to meet expenses as crude fell until 2016, the increase in output is expected to buy them time to replenish these funds, and address, for now, a gamut of economic issues and regional rivalries.

Why is the meeting important for India?
Ahead of the meeting, India made a fervent plea to the OPEC Forum — a conclave of ministers of both producing and consuming nations — to more than fill the supply gap.

High prices were giving “pain”, it said, and appealed for “reasonable” pricing. Surging crude prices have increased India’s oil import bill and burdened the trade deficit, and if the trend continues, the government will be forced to cut excise duty, increasing the fiscal deficit, and opening itself up to a lowering of its credit rating.

And yet, the relief from OPEC will not crash global prices; crude could at best fall to the Rs 70s range. This could ameliorate the woes of India — which approximates its budget on $ 65 a barrel — only in limited measure. But it will lower the import bill somewhat, bring down retail prices, and obviate the need to cut down revenue-earning excise duty on petrol and diesel.

What is OPEC?
An intergovernmental organisation whose stated 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”.

Set up at the 1960 Baghdad Conference with Iran, Iraq, Kuwait, Saudi Arabia and Venezuela as founding members, it now has 14 members, the later additions being Qatar, Libya, UAE, Algeria, Nigeria, Ecuador, Angola, Gabon and Equatorial Guinea. Indonesia was a member until 2016, when it pulled out for a second time.

(Adapted from The Indian Express)



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