OPEC’s output pact proposal

ECONOMY/ INTERNATIONAL/ GOVERNANCE

Topic:

• GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 
• GS-2: Effect of policies and politics of developed and developing countries on India’s interests

OPEC’s output pact proposal

Definition: 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. 

What is the background?

• Low Oil Prices in wake of Pandemic-induced global slowdown: 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. 
• Production Cut to boost Prices: As a result, OPEC+ group of countries had, in April 2020, entered into a two-year agreement, which entailed steep cuts in crude production (reduction in supply leads to increase in prices)
  • Subsequently in November 2020, the price of Brent crude started climbing and has, now, risen to $76.5 per barrel —buoyed by the steady rollout of vaccination programmes around the world.
• Continuance with Production Cut: OPEC+, however, maintained lower levels of production despite crude oil prices reaching pre-Covid levels, with Saudi Arabia, notably, announcing a further cut in production of 1 million barrels per day for the February-to-April 2021, which helped boost rising prices even further
• Criticism on rising Oil Prices: The OPEC+ group ran into sharp criticism from developing economies, including India, for deliberately maintaining low supply levels to raise prices. This was in turn slowing down the economic recovery of countries post the pandemic.
• Gradual Increase in Oil Production: Amidst the growing criticism, OPEC+, in April 2021, agreed to gradually increase crude production as prices reached $64.5 per barrel.

What is the issue?

• UAE agreed that there was a need to increase crude oil production from August, but did not agree to a condition by the OPEC Joint Ministerial Monitoring Committee (JMMC) that the two-year production agreement be extended by six months.
• The UAE’s key objection to the existing agreement is the reference output used to calculate the total production apportioned (allotted) to each oil-exporting country.
• The UAE noted that the baseline production level reference used in the current agreement was not reflective of the UAE’s production capacity and, therefore, led to the UAE being apportioned a lower share of total production of crude oil.

How will this impact India?

• 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. 

• India is currently facing record-high prices of petrol and diesel (near to Rs 100/ltr). If oil prices do not come down, petrol/diesel prices will further increase which in turn will lead to inflation hampering economic recovery (as purchasing capacity lowers)

Connecting the dots:

• Oil Price Rise
• 2020 Oil Market meltdown
• India’s GDP fall