CUTS IN OIL PRODUCTION AND IMPACT ON INDIA – ECONOMY
News: Why
have key oil producers vowed output cuts?
What's in the news?
● Major
oil-producing countries including Saudi Arabia, Iraq, the United Arab Emirates,
as well as Russia, have announced cuts in oil production that will start in May
and last until the end of 2023.
Key takeaways:
● The
announcement caused an instant uptick in
prices of crude oil.
● On
April 3, the Organization of the Petroleum Exporting Countries (OPEC), at its
48th meeting of the Joint Ministerial Monitoring Committee, acknowledged the
crude oil production cuts announced by major oil-producing countries.
● The
OPEC+ countries include the 13 core
members of OPEC and 10 other major oil producers.
● The
new production cuts are in addition to those announced in October 2022.
Significant cuts by OPEC+:
● As
per the latest voluntary production adjustment, Saudi Arabia will be cutting
5,00,000 barrels a day; Iraq 2,11,000; United Arab Emirates 1,44,000; Kuwait
1,28,000; Kazakhstan 78,000; Algeria 48,000; Oman 40,000; and Gabon 8,000
barrels a day. These cuts are in addition to the two million barrels per day
cut announced in October 2022.
● Russia
had already announced a cut of 5,00,000 barrels a day, earlier this year.
Why are OPEC+ countries cutting crude oil production?
1. Market Stability:
● According
to OPEC's official statement, the decision to cut crude oil production was
aimed at supporting market stability.
2. To avert price cap:
● In
February 2023, Russia announced it would cut crude oil production by half a
million barrels a day after Western countries capped the price of its crude as
a response to the war in Ukraine. Russia's Deputy Prime Minister Alexander
Novak said that cutting production would help restore "market
relations".
○ The
G-7 bloc of advanced economies announced
a price cap of $60 per barrel for Russian crude oil in December 2022.
○ The
G7 and all EU Member States have taken a decision that will hit Russia's
revenues even harder and reduce its ability to wage war in Ukraine.
○ It
will also help us to stabilize global energy prices, benefitting countries
across the world who are currently confronted with high oil prices.
3. To overcome fear of recession:
● The
recent developments in the banking sector in the U.S. and Europe, including the
collapse of the Silicon Valley Bank and the turmoil at Credit Suisse, have fuelled the possibility of an incoming
recession.
● In
March 2023, oil prices slipped 1% to a two-week low, on speculation of a
recession and therefore a reduction in oil demand.
4. Increase revenue of producing states:
● Experts
believe that cutting production will lead to an increase in costs of crude oil
in the international market. A sudden jump in both Brent crude and the U.S.
West Texas Intermediate (WTT) crude prices - both leading global oil benchmarks
- was observed in the wake of the announcement of the decision to reduce
production.
5. Deal with short sellers:
● The
production cut is also a way of punishing short sellers who bet on oil prices
declining.
Stats on Indian oil imports:
● According
to the World Energy Outlook 2021 data, India
ranks third in the world in crude oil imports after China and the U.S.,
while it ranks a distant 21 in crude oil production and 26 in natural gas
production.
● The
disparity in the two rankings shows the country's increasing reliance on
imports to meet its energy needs.
Recent shift in oil imports:
● India's crude oil import
from Russia touched new heights in February this
year, reaching 1.6 million barrels per day. This was more than the combined
imports from conventional suppliers like Iraq and Saudi Arabia. At the same
time, supply from Iraq and Saudi Arabia touched a 16-month low.
● Russia's
increased share in India's crude oil import is a direct consequence of the fallout between Russia and western countries following
its Ukraine invasion that began in February 2022.
● The
U.S. and countries in Europe decided not to buy crude oil from Russia in a bid
to isolate the country on an international scale. The decision, however,
provided India with an opportunity to buy Russian oil, reportedly at discounted
rates.
Impact on India:
1. Current Account Deficit:
● The
increase in oil prices will increase the
country’s import bill, and further disturb its current account deficit
(excess of imports of goods and services over exports).
● According
to estimates, a one-dollar increase in crude oil price increases the oil bill
by around USD 1.6 billion per year.
2. Inflation:
● The
increase in crude prices could also further increase inflationary pressures
that have been building up over the past few months.
● This
will decrease the space for the monetary
policy committee to ease policy rates further.
3. Fiscal Health:
● If
oil prices continue to increase, the government
shall be forced to cut taxes on petroleum and diesel which may cause loss of revenue
and deteriorate its fiscal balance.
● The
growth slowdown in the last two years has already resulted in a precarious
fiscal situation because of tax revenue shortfalls.
● The
revenue lost will erode the government’s ability to spend or meet its fiscal commitments
in the form of budgetary transfers to states, payment of dues and compensation
for revenue shortfalls to state governments under the goods and services tax
(GST) framework.
4. Geopolitical issues
led to supply chain shocks
WAY FORWARD:
● Demand substitution
by promoting usage of natural gas as fuel/feedstock across the country towards
increasing the share of natural gas in the economy.
● Moving
towards a gas based economy,
promotion of renewable energy.
● Alternate fuels
like ethanol, second generation ethanol, compressed biogas and biodiesel,
refinery process improvements.
● Promoting
energy efficiency and conservation.
● Efforts
for increasing production of oil and natural gas through various policies under
Production Sharing Contract (PSC) regime, Discovered Small Field Policy,
Hydrocarbon Exploration and Licensing Policy, etc.
● Government
has also provided functional freedom to National Oil Companies and for wider
private sector participation by streamlining approval processes including
electronic single window mechanism.
● To
give a major thrust to Ethanol Blending
Programme, Government of India through Oil Marketing Companies (OMCs) are
establishing 2G Ethanol plants across the country.
● To
promote the use of Compressed BioGas
(CBG) as automotive fuel, the Sustainable Alternative Towards Affordable
Transportation (SATAT) initiative
has been launched under which oil Marketing Companies are inviting Expression
of Interest from potential entrepreneurs to produce CBG.