The dramatic announcements related to oil last week may not bite your pocket right away, but there is a lurking disaster that could prove to be the sting in its tail.
Late last week, the cartel of major oil producing nations (it includes the original Organisation of Oil Producing Countries or OPEC, along with non-members who are major producers, like Russia, Bahrain, Kazakhstan etc) took just 30 minutes to come to a decision the rest of the world was dreading — a sharp cut of 20 lakh barrels a day in crude oil production, amounting to two per cent of global oil production.
Alarm bells rang around the world instantly due to three distinct, and disparate, reasons. Due to economic, geo-political, as well as political reasons.
The economic reason is probably the easiest to understand. Oil prices had shot up to crisis-levels since Russia’s invasion of Ukraine earlier this year, leading to staggering inflation that sparked off fears of a looming recession. It also cut short on the tracks an economy wagon that had just about begun to revive after the devastating impact of the Covid-19 pandemic.
“OPEC+ oil price rise may increase inflation across the globe,” warned Sumit Shandilya, professor - operations & supply chain at BML Munjal University’s School of Management.
At a time when the global economy had still not recovered after the pandemic, this only spells a global recession that is now all but certain. Though ironically, the impending recession is the exact reason that OPEC+ gave — that demand for oil will go down as the world goes into recession and that is why they are cutting production.
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“We would rather be pre-emptive than be sorry,” said Saudi Energy Minister Prince Abdulaziz bin Salman afterward.
They have actually reduced the production which in turn may allow them to price it and increase it as per convenience,” added Shandilya.
The issue is very much geo-strategic as well. Shut out (mostly) from international markets, Russia desperately needs to maximise revenue from its oil, which will also help it sustain its war effort in Ukraine. It has a Hobson’s choice to make when it comes to selling its gas to Europe — it can cut off supplies to the continent in a huff for the upcoming winter when western Europe needs it most, but it is also a reality that Putin needs whatever desperate foreign exchange it can get. On top of it, European countries are meeting up to put a market cap on the price they will pay for Russian gas this winter, meaning raising oil prices for the international market is pretty crucial for Moscow.
That Putin managed to convince OPEC+ nations to agree to the cut so fast does not augur well for the US — President Biden had flown all the way to Riyadh recently to meet and convince MBS to not go for a production cut. All to no avail. Countries like India and China have also refused to toe the western line and not buy petroleum products from Russia, with Petroleum Minister Hardeep Puri stating this weekend that “India will buy oil from wherever it has to”.
The OPEC+ production cut, though it is supposed to come into effect only from next month, is already causing ripples in the international markets. Crude peaked at 130 dollars after the Ukraine war started, but had fallen below 85 by last month. But the latest announcement caused prices to increase 1.5 per cent straightaway after the announcement. Yesterday, some reports said prices in the US had gained nearly 17 per cent.
And can politics be far behind? Price rise in the US doesn’t bode well for Biden with mid-term elections coming up. “The president is disappointed by the shortsighted decision by OPEC Plus to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine,” an official statement read.
Politically and economically, it could prove to be a hot potato for the Narendra Modi government as well. While petrol and diesel prices have been kept under check for months now despite all the flip-flop in global petroleum prices, it is proving to be a pretty costly affair. State-run oil companies are in big losses, and a recent report said that the cabinet will have to relent by providing a Rs 20,000 crore aid to them. The oil ministry had originally asked for Rs 28,000 crore.
While your petrol pump prices may remain unchanged at least till the Gujarat and Himachal Pradesh assembly elections, it does leave a deep hole in the pocket of the state exchequer. India imports 87 per cent of its oil. After the Ukraine war started and global prices shot up, India’s crude oil import expense increased by an additional Rs 32,000 crore in the last five months alone. This, despite buying up a lot of discounted crude from Russia.
The writing on the wall is clear. Oil has once again taken centrestage, and will just be the determining factor of upcoming economic pains. The government is in a bind — should it increase prices and not just antagonise voters but usher in inflation and slowing of the economy, or should it keep prices in check and incur further debilitating losses to an economy that has still not recovered from the pandemic?