Striking the balance

On April 2, OPEC (Organisation of Petroleum Exporting Countries) and its allies, including Russia, agreed to widen crude oil production cuts to 3.66 million barrels per day (bpd), or 3.7 per cent of the global demand. Saudi Arabia has announced a voluntary output cut of 1.66 million bpd on top of the existing 2 million bpd cuts (since October 2022). These cuts were made as a precautionary measure aimed at supporting market stability. The voluntary cut starts in May and would last until the end of 2023. The surprise announcement helped push up oil prices by USD 5 per barrel, within 72 hours, to above USD 85 per barrel. Nonetheless, it is argued that excessively high oil prices might be counterproductive for OPEC+ as they speed up inflation, including for goods the group needs to purchase. High crude prices would also encourage speedier production gains from non-OPEC members and investments in alternative sources of energy.

OPEC+

OPEC, formed in 1960 with the aim of fixing the worldwide supply of oil and its price, is a cartel of 13 oil producer countries namely: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Algeria, Angola, Congo, Equatorial Guinea, Gabon, Libya, Nigeria, and the United Arab Emirates (UAE). Currently, OPEC nations produce around 30 per cent of the world’s crude oil. Saudi Arabia is the biggest single oil producer within OPEC, producing more than 10 million barrels a day.

In 2016, when oil prices were particularly low, OPEC joined forces with ten other oil producers to create OPEC+. These countries were: Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan. These new members included Russia, which also produces over 10 million barrels a day. Together, these 23 nations produce about 40 per cent of the entire world’s crude oil, reports BBC.

OPEC+ has the economic capability to disrupt or enhance the supply of oil to substantial levels at any time, severely affecting oil prices. Experts believe that it can exert a substantial influence on the global oil market.

However, some of the top oil-producing countries are non-OPEC nations. This includes the United States of America, which is the number one producer, as well as Canada and China. But in the case of exports, OPEC countries like Saudi Arabia, Iraq, and UAE dominate the list. Russia — one of the members of OPEC+ — has emerged as the major producer and exporter of crude oil. Refer to the Table for details.

Petrodollar: the crude equivalent standard

Paying for oil in US dollars has been a nearly universal practice for decades since 1973 when the US dollar embraced crude oil as the new gold and migrated to the ‘crude equivalent standard’ from the ‘gold equivalent standard’ of 1944. Petrodollar or Petro currency refers to the US dollar traded for worldwide crude-oil exports. It facilitates the investment of export gains as the dollar is the world’s reserve currency. US President Richard Nixon withdrew the dollar from the gold standard on August 15, 1971, because of stagflation and USA’s dwindling gold reserves.

It may be recalled that in 1973, the US and Saudi Arabia entered into an agreement, and the US agreed to offer armed protection to Saudi Arabia and provide weaponry and other military supplies. In return, Saudi Arabia, the leader of the Arab region, and OPEC agreed to sell all oil in US dollars. Moreover, Saudi Arabia would recycle the surplus dollars into the American economic system using US treasury bills and bonds. By 1975, all OPEC members embraced the Petro currency arrangement, and consented to export oil in US dollars. As a result, the American currency got pegged, by default, to the crude oil price. If the crude price increases demand for the US dollar increases. Thus, the US dollar became the reserve currency for most central banks worldwide, as it was the chief currency needed for natural gas and oil trading, reported Millennium Post.

With the emergence of the new world order, the Eurasian bloc, led by China and Russia, is now challenging the near monopoly of the USD.

Reasons for production cuts by OPEC+

Two factors primarily influence the global oil price: geopolitical developments and economic events that can lead to changes in oil demand and supply levels, which ultimately determine the price. Analysts have identified at least four major reasons why OPEC+ has decided to cut output, reports Reuters. These are:

Apprehensions about weak global demand: It is feared that a global recession could lead to lower oil prices. Worries of a fresh banking crisis have led investors to sell out of risk assets such as commodities with oil prices which fell to nearly USD 70 per barrel from near an all-time high of USD 139 in March 2022. Russian deputy prime minister Alexander Novak said that the Western banking crisis was one of the reasons behind the cut, along with “interference with market dynamics”, a Russian expression to describe a Western price cap on Russian oil.

Punishing speculators: It is believed that the cut will punish those who bet on the oil price decline (short sellers). In 2020, Saudi Energy Minister warned traders against betting heavily on the oil market, saying he would try to make the market jumpy and promised that those who gamble on the oil price would face disastrous consequences.

Seeking higher price: Many analysts believe that OPEC+ was keen to put a floor under oil prices at USD 80 per barrel while UBS and Rystad predicted a jump back to USD 100. According to Goldman Sachs, OPEC’s power has increased in recent years as US shale responses to higher prices have become slower and smaller, in part because of pressure on investors to stop funding fossil fuel projects.

OPEC vs NOPEC: America has lost its historical grip on OPEC, as its main ally Saudi Arabia, the leader of OPEC, has aligned with China. For decades, the USA has been trying to counter OPEC by threatening legal action against its members through an initiative named NOPEC — the No Oil Producing and Exporting Cartels (NOPEC). Several attempts to pass NOPEC legislation in the US Congress have long worried OPEC’s de facto leader Saudi Arabia. It may be recalled that in 2019, Saudi Arabia threatened to sell its oil in currencies other than the dollar if Washington passed a version of the NOPEC Bill, which would undermine the dollar’s status as the world’s main reserve currency. But the tension between Washington and Riyadh reached a flashing point when the NOPEC Bill was passed by a Senate committee with 17-4 votes on May 5, 2022. The Bill is intended to protect US consumers and businesses from engineered oil spikes. If signed into law, the US attorney general would gain the option to sue the oil cartel or its members, such as Saudi Arabia, in federal court. However, it is unclear exactly how a federal court could enforce judicial antitrust decisions against a foreign nation.

Another reason for the production cut could be to avenge the International Energy Agency’s (IEA’s) decision to release oil stock in 2022, which IEA claimed was necessary to bring down prices amid fears of sanctions that would disrupt Russian supply. The United States, which released most stocks, said it would buy back some oil in 2023 but later ruled it out. JP Morgan and Goldman Sachs said the US decision not to buy back oil for reserves might have contributed to the move to cut output by OPEC+ countries.

Impact on India

The voluntary cuts by countries in the oil cartel are set to start in May and last till the end of 2023. Both Saudi Arabia and Russia will trim oil production by 500,000 barrels per day until the end of this year while other OPEC members like Kuwait, Oman, Iraq, Algeria, and Kazakhstan also reduce output. Reduced supply is likely to push the crude prices to USD 100 per barrel. Countries heavily dependent on imported oil, like India, Japan, and South Korea, are likely to be severely hit.

India is the third largest oil consumer in the world and has been purchasing Russian oil at a steep discount since sanctions were imposed on Russia in response to its invasion of Ukraine. India imports 85 per cent of its crude oil consumption, and its crude oil imports rose by 8.5 per cent in February, compared to the same period last year. Analysts fear that if the oil price goes up further, even the discounted Russian crude will start to hurt India’s growth, reports CNBC.

Russia has emerged as the single-largest supplier of crude oil which is converted into petrol products at refineries. India’s imports from Russia jumped about five times to USD 41.56 billion during the April-February period of FY2022-23. India’s imports of crude oil from Russia soared to a record 1.6 million barrels per day in February and are now higher than combined imports from traditional suppliers Iraq and Saudi Arabia. India buys more than one-third (around 35 per cent) of its imported crude from Russia. In February 2022, before the start of the Russia-Ukraine war, Russia’s share in India’s crude imports was negligible.

Iraq — the second largest oil source for India — supplied 9,39,921 barrels per day (bpd) of oil in February while Saudi Arabia supplied 6,47,813 bpd of oil. The UAE overtook the US to become the fourth-largest supplier at 4,04,570 bpd. As per a report by The Hindu, the US supplied 2,48,430 bpd, down from 3,99,914 bpd in January. India sources crude oil from 39 countries. The rise in Russian imports has been at the expense of Saudi Arabia and the United States. Oil imports from Saudi fell 16 per cent month-on-month and that from the US declined by 38 per cent.

With the end of US waivers that allowed the import of crude from Iran without sanctions, India stopped buying oil from Iran in FY19. In the immediate years before the ban, Iran was India’s third-biggest source of crude oil. Between FY07 to FY09, Iran was the second-biggest source after Saudi Arabia. Interestingly, after Iran’s exit, India filled the void by importing oil from the US, the country which initiated the sanctions. Iran may make a comeback as a major oil partner for India.

In May 2022, India bought Russian oil at a discount of USD 16 a barrel. Though the discount was reduced and was at USD 14 a barrel in June, USD 12 a barrel in July, and USD 6 a barrel in August, India is estimated to have saved over Rs 35,000 crore by importing cheap Russian crude between February and November 2022, reports MoneyControl.

The Hindu reported that almost a quarter of the Russian imports are now paid in UAE’s dirham. India’s largest lender State Bank of India has a nostro, or foreign currency, account in Russia. Similarly, many banks from Russia have opened accounts with Indian banks to facilitate trade. Bank of Baroda and Axis Bank have handled most of the dirham payments.

In an interesting development, Bangladesh and Russia have recently agreed to use Yuan to settle payment for a nuclear plant that Moscow is building in Bangladesh, reports Reuters. Under the agreement, Bangladesh will settle payments with Russia via a Chinese bank. Russian beneficiaries will reportedly receive the funds through China’s Cross-Border Interbank Payment System (CIPS), established in 2015, since many Russian banks have been cut off from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system.

India’s oil security

Thanks to its partnerships with BRICS and SCO, India is in a secure position in terms of oil supplies. It is reported that the next edition of the BRICS Summit in August could put in place a mechanism for transition to trade settlements in national currencies among member states. Now the BRICS nations — Brazil, Russia, India, China, and South Africa — are setting themselves up as an alternative to existing international financial and political forums. These countries, which house over 41 per cent of the world’s population, are trying to position themselves as representatives of the Global South, providing an alternative model to the G7 which is an “informal forum” of heads of state of the world’s most advanced economies, founded in 1975. Germany, France, the United Kingdom, Italy, Japan, Canada, the US, and the European Union are members of G7.

India is already buying crude from Russia in local currency. Recently, China and Russia have also agreed to trade in local currencies. India-China trade for 2022 climbed to USD 135.98 billion – a rise of 8.4 per cent over the USD 125-billion mark a year earlier, reports The Wire. Despite the tension along the border, data released by the commerce ministry showed, China overtook the US to return as India’s largest trade partner, with USD 11.49 billion worth of goods traded in July 2022, underscoring the country’s growing reliance on its northern neighbour.

Recently, Brazil and China have deepened their cooperation on Yuan settlement as the alternative to the US dollar in cross-border trade and investment. Last week, China’s largest commercial bank, Industrial and Commercial Bank of China (ICBC), processed the first cross-border Yuan settlement in Brazil at its local branch there, marking another significant step in the Yuan’s globalisation, reports Global Times. The joint statement made during Brazilian President Luiz Inacio Lula da Silva’s state visit to China last week mentioned the signing of multiple bilateral agreements, most of which were on trade, technological and agricultural cooperation. Both Presidents have vowed to deepen cooperation in various fields under the BRICS framework, reports CGTN.

SCO is the other platform that can be properly used by India, which will ensure a secure supply of crude oil in a turbulent time. Launched in Shanghai in June 2001, the SCO has eight full members, including its six founding members — China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan. India and Pakistan joined as full members in 2017, and at the Samarkand summit in 2022, Iran was admitted as a permanent member of the SCO. Over the years, SCO has emerged as one of the largest trans-regional international organisations.

In March this year, the government of Saudi Arabia officially agreed to join the Shanghai Cooperation Organisation (SCO) as a dialogue partner. India and Iran may use the Shanghai Cooperation Organisation (SCO) platform to revive their oil trade.

Conclusion

In 2023, India is playing host to two major Summits — G20, which is an extended group of G7 countries, and the Shanghai Cooperation Organisation (SCO). The USA and its NATO allies are desperately trying to involve India in their fight against emerging superpower China and its Eurasian allies. In March, the US permanent representative to NATO said, NATO’s door was open for more engagement with India should the Indian government seek it. Meanwhile, Politico reported that European leaders are becoming increasingly favourable towards French President Emmanuel Macron’s push for “strategic autonomy” away from the United States. Now, the USA is desperately seeking India’s support to remain relevant in the changing geopolitics where it is increasingly getting marginalised. India also should maintain its strategic autonomy and not get dragged into an anti-China alliance led by the USA.

Unlike G20, which is a forum and not a legislative body, SCO is a multinational intergovernmental institution. As major OPEC+ countries like Russia, Iran, Saudi Arabia, and Kazakhstan are associated with SCO, India must put the appropriate focus, as it deserves, on the upcoming SCO Summit.

With a history of thousands of years of peaceful co-existence between India and China, there is no reason to believe that the present ‘trust deficit’ cannot be rebuilt into mutual trust. As both China and India are members of BRICS, G20, and SCO, it is important that these two great nations amicably settle their border issues and lead the world to a better future.

Views expressed are personal