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IASbaba’s Daily Current Affairs – 12th December, 2015

  • December 12, 2015
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IASbaba's Daily Current Affairs Analysis, IASbaba's Daily Current Affairs December 2015, International, UPSC
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IASbaba’s Daily Current Affairs – 12th December, 2015

 

INTERNATIONAL

 

TOPIC

  • General Studies 1: Effects of globalization on India;  Distribution of key natural resources across the world (including South Asia and the Indian subcontinent); factors responsible for the location of primary, secondary, and tertiary sector industries in various parts of the world (including India).
  • General Studies 2: Indian Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests; Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora; Important International institutions, agencies and fora- their structure, mandate.
  • General Studies 3: Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth. 

 

OPEC & the present Global Order

OPEC: The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization, created at the Baghdad Conference on September 10–14, 1960; presently headquartered at Vienna, Austria

Objective: 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

Risks with the Global Oil Economy:

  • Macroeconomic uncertainties
  • Heightened risks surrounding the international financial system
  • Escalating social unrest in many parts of the world
  • Speculation and oversupply

Present Global Oil Order

Initially OPEC decided to take on upstart US shale oil producers by keeping output steady and prices low and has gone ahead and raised its output ceiling at present

Renewed declaration of war?

Hardly—the organisation’s member states were pumping more than its self-imposed quota, producing about 31.4 million barrels a day yet the lifting of the ceiling caused a sharp drop in the price of Brent crude

Shocker— 3 elements

  • Saudi Arabia was perceived by analysts to be softening its stance
  • A report from Energy Intelligence suggested the kingdom was about to propose a cut of one million barrels a day production if non-OPEC producers would cooperate
  • Pressure being put on the Saudis by some member OPEC countries to cut output and help drive up the price

False Signal as—

  • Saudis have no choice but to keep pumping
  • Price fluctuations are more evidence of these nations not being side-lined
  • Saudi Arabia is still the global swing producer

OPEC: The Failing Giant??

  • No explicit methods for enforcing discipline
  • Disregard to the decisions by members especially the strongest, Saudi Arabia

Major Hold: By Saudi Arabia

  • As the smaller producers need Saudi Arabia to stabilise the market when their own output fluctuates
  • Saudis need the smaller producers to wield outsize power in a market where four of the five biggest producers are not OPEC members

Saudi Arabia’s policy

“Saudi Arabia’s output behaviour has varied over time in a systematic way, in response to market conditions and also to interruptions within OPEC. Its behaviour differed between ‘normal’ periods and periods with interruptions. In normal periods, when faced with reduced demand, Saudi Arabia cooperated with its OPEC partners to restrict output. During interruptions, however, it would increase its output to offset reductions in the rest of OPEC, not to match the reductions.”

Mid-1980s: Cut exports trying unsuccessfully to hold up high global prices,

1990s: Kept output steady, allowing other OPEC countries to regain market share at their expense

But

Oil Market today—

Exporters:

  • Face higher costs
  • Big budget deficits
  • Need a big output cut from the Saudis
  • Willing to pitch in with their own small cuts as long as the price rises

Saudi Arabia has often obliged in the past but they will not at present. WHY?

  • If they cut output, the enormous losses sustained by OPEC members in the past year will go in vain
  • US will increase production, which will lead it to lift its oil export ban, and OPEC members to start losing their export markets
  • The organisation’s relevance will truly be at an end: Having lost its swing producer status, Saudi Arabia won’t be able to stabilise prices for other OPEC nations

 

Saudi Arabia— No cut in Output

US should not be able to claim the swing producer role

If the Saudis agreed to a production cut now and prices jumped, it would provide relief to the frackers

  • Prediction of International Energy Agency:US output of shale oil would drop by 600,000 barrels a day (the October estimate was a 400,000-barrel decline)
    • Frackers: Cannot afford to hedge
    • Credit markets are tightening for US oil producers, and oil and gas companies now account for a third of total US distressed debt
    • Rate increase on its way

OPEC members might get more revenue but they would face a battle for their traditional markets- ‘boosted global demand and curbed growth in supplies of US shale oil’

Nature of current Oil Prices

  • Structural in nature and one that can keep oil prices depressed for a long time
  • The minute oil prices go up shale oil production will go up again to its previous levels
  • OPEC: Can only slowdown its production
  • Shale oil’s shortcoming: Its wells depletion rate

The global demand for oil in 2015 has been increasing by 1.4 per cent translating into 1.3 million barrels a day or 1.4 million barrels a day which marks a good and positive development but what is preventing the price from increasing – is that every time the price shows signs of moving up, OPEC and particularly Saudi Arabia introduces more oil thus exacerbating an already existing glut

Shale Invasion:

  • Higher oil prices led to a search of an alternative source of oil and this gave birth to the development of shale gas from newly developed technology, mainly in the US.
  • From being an importer of oil, USA turned into a net exporter in less than a decade
  • High oil prices gave the shale oil industry the incentive to innovate and start commercial production.

Saudi Arabia:

Bluffed of refusing to cut production: Assumption that if prices fall, shale oil wells will shut down and the companies will have to go in for bankruptcy. Initially it did work that way butdespite lesser wells running, oil production in the US touched a 43-year-old high of 9.6 million barrel per day.

An opportunity: For the shale gas producers to

  • Cut down cost,
  • Renegotiate their terms with service providers and
  • Increased production as a way of generating more dollars- Technological advancement in drilling led to more oil being produced from the same well

Shale oil is a fact of life and even if OPEC can slow it down but it is geology that keeps the power within it, to eventually kill Shale oil.

OPEC & Global Oil Scenario (Estimated Data)

  • Share of global supply will remain steady at 41% until 2020 and will rise to 44% by 2025
  • Production growth from non-OPEC countries will slow over the next five years and halt by 2020
  • Price of crude – trading below $50 a barrel – may remain near current levels next year and in 2017
  • By 2040, OPEC could account for almost half of global oil production

India—need not worry with the fight for oil supremacy as:

  • Keeps its oil imports bill low and
  • Deficits under check

Note: Double dip signals that prices are heading downwards and might touch the previous low and are likely to stay there for some time

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OR

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