CONTEXT
- The latest round of meetings among the OPEC+ group of oil-exporting countries has stalled as the UAE has pushed back proposals making an increase in crude oil supply conditional on an extension to an output agreement.
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THE OUTPUT PACT
- The OPEC+ group of countries had, in April 2020, 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 of under $20 per barrel in April 2020 as economic activity around the world crashed as countries dealt with the pandemic.
- The initial production cut by OPEC+ was about 10 million barrels per day or about 22 per cent of the reference production of OPEC+ nations. (Facts are not important just understand the issue of fluctuating production and prices)
- In November 2020, the price of Brent crude started climbing consistently and has, now, risen to $76.5 per barrel.
- Saudi Arabiaannounced a further cut in production of 1 million barrels per day for the February-to-April period, which helped boost rising prices even further.
- The OPEC+ group ran into sharp criticism from developing economies, including India, for deliberately maintaining low supply levels to raise prices.
PRESENT ISSUE RAISED BY UAE
- 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.
- UAE rejected the extension of cuts beyond April 2022, when the current agreement terminates, without adjusting its baseline production – the level from which any cuts are calculated.
- The UAE, the third-biggest oil producer in OPEC behind Saudi Arabia and Iraq, believes its baseline was originally set too low in October 2018 when the OPEC agreed on current figures.
- The United Arab Emirates also believes the baseline is “outdated” since it does not reflect the growth of its production capacity as a result of billions of dollars of investments in recent years.
- The Emiratis have asked for their baseline to be reviewed and recalculated, but the idea has been rejected by Saudi Arabia.
IMPACT OF OPEC+ CONFLICT ON INDIA
- Higher prices of crude oil – 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.
- Burden on common man – India is currently facing record-high prices of petrol and diesel, with pump prices of the former exceeding Rs 100 per litre in 13 states and Union Territories.
- Slow Recovery – The high price of crude oil was slowing down the economic recovery of developing economies post the pandemic.
- Inflation – owing to higher prices of crude oil India’s retail inflation taken upper trajectory. It is higher than official target 6 % in month of June and same is expected in upcoming months.
ORGANIZATION OF THE PETROLEUM EXPORTING COUNTRIES
- The Organization of the Petroleum Exporting Countries is an intergovernmental organization or cartel of 13 countries.
- Founded on 14 September 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela), it has since 1965 been headquartered in Vienna, Austria, although Austria is not an OPEC member state.
- The 13 member countries accounted for an estimated 44 percent of global oil production and 81.5 percent of the world’s “proven” oil reserves, giving OPEC a major influence on global oil prices.
- The formation of OPEC marked a turning point toward national sovereignty over natural resources, and OPEC decisions have come to play a prominent role in the global oil market and international relations. The effect can be particularly strong when wars or civil disorders lead to extended interruptions in supply.
- The current OPEC members are the following: Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of the Congo, Saudi Arabia (the de facto leader), the United Arab Emirates and Venezuela.
- Former OPEC members are Ecuador, Indonesia and Qatar.
OPEC Plus
- It is a loosely affiliated entity consisting of the OPEC members and 10 of the world’s major non-OPEC oil-exporting nations which are:
- Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan.