Context:

The world’s largest group of oil producers, known as OPEC+, has decided to continue reducing oil production to avoid a drop in oil prices due to concerns about a global economic slowdown. 

• Saudi Arabia, (a major oil producer and member of OPEC), has voluntarily pledged to further decrease its oil output by an additional 1 million barrels per day in July 2023. 

Concerns:

• India relies on importing over 80% of its crude oil needs, and is cautious about the combined supply reductions by Saudi Arabia and OPEC+. 
• However, India has been diversifying its oil sources and buying more oil from Russia, which has helped decrease the price of imported oil. 

What is OPEC+ and How Does It Work? 

• OPEC+ is a group of 23 countries that sell crude oil internationally and make decisions about how much oil to sell. 
  • The core of this group is OPEC, made up of 13 countries, mainly from the Middle East and Africa. 
  • OPEC was created in 1960 as a group that aimed to control the global supply and price of oil. 
• In 2016, OPEC joined forces with 10 other oil producers, including Russia, to form OPEC+. 
  • Russia, as a member, is one of the world’s largest oil producers, producing over 10 million barrels per day. 
• OPEC+ adjusts its oil supply to match the demand and maintain a balanced market. When demand for oil decreases, they reduce supply to keep prices higher. They can also increase supply to lower prices.

Why is OPEC+ Reducing Oil Production? 

• Concerns about Weak Global Demand
• Interference with Market Dynamics
• Fears of a Banking Crisis which can impact oil prices
• Slow Growth and Lower Demand, raising concerns about falling oil prices
• US Debt Ceiling Negotiations
• Punishing Speculators 
• US Output Increase due to shale oil growth and technological advancements, which could affect global oil supply and prices. 

Impact of Reduced Oil Production on India: 

• Inflationary Pressure: The production cut by OPEC+ will lead to higher crude oil prices, causing inflation in India. 
• Economic Slowdown: Higher oil prices will increase production costs for industries, affecting their profitability and competitiveness. 
• Current Account Deficit: India’s import bill for oil will rise, worsening the current account deficit. 
• Government Finances: The government will face higher subsidy burdens due to increased oil prices, impacting fiscal deficit and public spending. 
• Currency and External Vulnerability: Higher oil prices will increase India’s dependence on foreign exchange reserves and external borrowing, making it vulnerable to-currency fluctuations and global economic shocks. 
• Energy Security: Reduced oil production emphasizes the need for India to enhance its energy security by diversifying energy sources and exploring alternative fuels. 

Strategies to reduce India’s Oil Dependency: 

• Promote Domestic Oil and Gas Production by incentivizing exploration and production activities within India. 
• Diversify Energy Sources by focusing on alternative and renewable energy sources. 
• Enhance Energy Efficiency Measures by prioritizing energy-saving initiatives across sectors. 
• Develop Strategic Oil Reserves to establish and maintain an adequate strategic petroleum reserve.
• Strengthen International Energy Partnerships with non-OPEC oil-producing countries. 
• Support Research and Development by investing in advanced energy technologies and innovation. 
• Encourage Sustainable Transportation by promoting public transportation systems and electric vehicles. 
• Engage in Energy Diplomacy by actively participating in international forums to advocate for fair oil markets. 

News Source: The Guardian