The decision of the Organisation of the Petroleum Exporting Countries (OPEC) to extend oil supply cuts at the recently concluded meeting may have important implications for both oil producers and more importantly oil consumers, like India. Collectively, OPEC and its allies (together known as the OPEC+) would curb production by 1.2 million barrels per day (mb/day) for nine months until March 31.
Context
Global commodity prices saw a dip after the global financial crisis. This occurrence was counter-intuitive due to a kind of hysteresis and slowdown in demand and thus, the resulting price drop happened much later. However, the prices peaked in 2012 when the OPEC average crude oil price touched a high of almost $110. But then prices began to plummet- as low as $40 in 2016.
Now, the OPEC+ alliance has been reducing oil supply since 2017, to prevent prices from sliding and has opted to extend the cuts repeatedly since then. Credence to this statement includes the shale oil boom, which requires less upfront investment to push up oil supply. Also, the economic reprieve provided for Iran, one of the core founders of OPEC, ramped up the production, followed by differences propping up among members who failed to reach an agreement that consequently resulted in oversupply. These were the reasons that have caused oil prices to remain at rock-bottom.
So, the recent decision to curb supply is poised to restore demand. But, amidst signs that the global economic slowdown may hit the oil demand growth, OPEC and allies might face an uphill task to shore up prices by reining in supply.
How does this play out for India?
These extensions of production cuts come against the backdrop of supplies from Iran and Venezuela drying up from India’s energy baskets. The US sanctions on Iran and Venezuela in conjunction with the extra cuts made by Saudi Arabia have taken more oil off the market than the rest of the 11 countries involved in the production cut agreement combined. With tensions escalating in the Persian Gulf, India, the world’s third largest oil importer has been trying to impress upon the Saudi Arabia-led cartel, its own concerns on volatility in crude prices and its impact on India consumers.
Though the United States on its part has promised India of adequate crude oil supplies as was mentioned by US Secretary of State Mike Pompeo during his visit to India, but it is not so much about the sourcing rather than the price at which it is bought, which will impact the Indian economy.
What India needs now is a carefully driven strategy that is not myopic in nature, but instead, aims to gradually insulate the country from global oil price volatility. Such a strategy should be centered on three things: expediting migration to electric mobility, expanding the blending of biofuel in petrol and stimulating exports.
In this case, the much needed impetus to push electric mobility during the 2019 budget is a well-concerted move. Reducing the country’s reliance on oil imports would bode well for energy security and make the Indian financial markets less volatile in the event of untoward development of the oil market. Also, savings from reduced oil imports could in turn be used to finance the infrastructure projects which are crucial for India’s long-term growth prospect.
India Outbound
July 23, 2019
source https://indiaoutbound.org/its-just-the-oil-honey/
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