Consequential tweaking

Last week, the Organisation of the Petroleum Exporting Countries (OPEC), at its 48th meeting of the Joint Ministerial Monitoring Committee, confirmed that the member countries will slash oil production by 1.16 million barrels a day, effectively from May. In addition to the 13 OPEC countries, the ten other countries — Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan — that had joined the cartel in 2016 to make it OPEC+, are also party to this move. Notably, the recent decision to slash oil production follows a two million barrel per day cut made in October last year. OPEC, which was founded in 1960 with a view to controlling and balancing oil production and prices, has emerged as a powerful block that wields power to influence global economics and geopolitics. OPEC nations produce 30 per cent of the world’s total crude oil, and when additional members of OPEC plus are also counted, the figure goes up to 40 per cent. For quite a long time, OPEC had been facing a formidable competitor in the form of US Shale companies. But with the onset of the pandemic, conservative investors in the US, who primarily drove the growth of Shale production, started demanding for production discipline. Instead of “head-turning oil production figures”, they started emphasising on “consistent shareholder returns, positive free cash flow, and a smaller environmental footprint.” This threw the US Shale firms off-track when it comes to competing with the OPEC bloc in terms of production figures, thus, also taking away the former’s ability to balance the trajectory of energy-driven inflation. The OPEC+ now rules the roost. By controlling the production of crude oil, it can easily influence the prices. Last time, when the organisation slashed oil production by 2 million barrels per day in October, it instantly led to a five per cent price rise on international exchanges. The opinion on the rationale behind OPEC+’s output cut is divided. The official statement cited ‘market stability’ as a prime factor behind the move, which is quite ambiguous. There are two alternative interpretations. Firstly, OPEC might be apprehensive about the current slump in demand globally, and hence decided to curtail oil production as a responsive measure. The second interpretation is that the organisation could sense a phenomenal uptick in oil demand in the latter half of the year on account of approaching summer and China’s economic re-opening. Rather than being responsive, this consideration can be classified as pre-emptory. Experts believe that OPEC might be eying big profits in the coming months. Whatever be the driving motive, the move is likely to trigger energy-driven inflation at a time when the world is already struggling to come out of energy ramifications unleashed by the Russia-Ukraine war. Notably, the Western sanctions on Russian crude oil have also significantly exacerbated the energy-related chaos. In December last year, G-7 nations announced a price cap of USD 60 per barrel for Russian crude oil in order to hit Russian revenues, and “to stabilise global energy prices.” Following the imposition of the price cap, Russia announced that it would slash oil production by half a million barrels a day. This announcement, however, didn’t materialise on the ground and Russia continues to sell oil to China and India in significant quantities at lower prices. If the prices of global crude oil increase, it will be interesting to see what trajectory Russia will follow in terms of pricing. Thus, neither the Western sanctions have created any considerable dent in Russian revenues, nor have they succeeded in bringing about long-term energy stability. On the contrary, compounded with the recently announced output cuts, sanctions could make matters worse. As far as India — a major oil importing nation — is concerned, the degree of impact could depend upon a couple of factors. First, how Russia responds to the probable increase in oil prices. Second, how India reorganises its oil import basket, which has been tilted towards Russia vis-à-vis OPEC nations, lately.